Irish exchange rates 1698–1826: credit, market integration, and international trade
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This thesis is a study of the operation, evolution, and consequences of Irish pound exchange rates in the eighteenth and nineteenth centuries. I present a novel database of Irish pound exchange rates with sterling, for bills of exchange drawn both in Dublin and in London from 1698 until 1826, when monetary union with Britain saw the Irish pound assimilated into sterling. I combine this with other data to explore the relationships between exchange rates and credit markets, market integration, and international trade. To study the relationship between exchange rates and credit markets, I derive `shadow interest rates' for Dublin between 1760 and 1826. Shadow interest rates were the implicit interest rate component of exchange rates for bills of exchange, which (because of delays in communications) were instruments of credit as well as foreign exchange. My results show that Irish shadow interest rates averaged between 6% and 8%, while Dutch, English, and French rates were between 4% and 5%. Using a variety of econometric techniques, I examine the long-run trend of Irish shadow interest rates, and the connection between short-run economic crises and credit conditions. Moving averages show that Irish shadow interest rates increased gradually in the second half of the eighteenth century and structural analysis of these rates shows that by 1815 they averaged around 8%, indicating that the risk premium, above the rates of the core European financial centres, on Irish credit transactions through bills of exchange may have increased in the late eighteenth and early nineteenth centuries. Shadow interest rates also coincide with short-run economic crises and help to explain periods of volatility in the 1770s, in 1793–94, 1797–98, 1800–1805, and 1815–1820. To explore the historical process of commodity market integration, I test the law of one price between Irish and English grain markets from 1698 until 1826, using Irish exchange rates with sterling to express prices in a common currency. I test this theory econometrically using an autoregressive distributed lag (ARDL) cointegration model and a model of market efficiency. The ARDL model allows me to test for long-run price convergence, and the speed of adjustment following departures from the law of one price in the event of an economic shock. My findings suggest that Irish and English grain markets were integrated by the eighteenth century and that the level of integration increased over time, consistent with communications and infrastructural developments. Irish and English grain price changes were highly correlated in the eighteenth and early nineteenth centuries, suggesting that arbitrage was efficient between both markets. However, the level of efficiency fell in periods of famine and war. To examine the impact of exchange rates on trade flows, I test whether the Marshall-Lerner condition held for the two Irish pound revaluations of 1701 and 1737. This textbook condition states that a currency revaluation will lead to a deterioration in the balance of trade if demand for net exports is price elastic. I construct a trade weighted effective exchange rate index for Ireland, drawing upon a database of Irish eighteenth century trade, and by deriving Irish pound cross exchange rates with Ireland's main trade partners. I then use an event study approach to test whether excess movements in the exchange rate following revaluations caused significant changes in the price and volume of traded goods, and consequently in the trade balance. The results suggest that the Marshall-Lerner condition held for the Irish pound revaluation of 1701; exports fell in response to this revaluation as the increased value of Irish exports was offset by a decline in the volume of exports demanded. The Irish pound revaluation of 1701 was substantial; the currency had depreciated by close to 15% relative to its long-run par of exchange with sterling in the months before. In 1737 the Irish pound was also revalued, but only by around 3%, and the Marshall-Lerner condition failed to hold for this revaluation, suggesting that small movements in exchange rates did not cause significant movements in Irish trade flows. This thesis is an empirically informed study of historical exchange rates and their impact on core macroeconomic variables, an area which is particularly under-explored for Ireland. It provides new evidence on the operation of credit in Ireland in the eighteenth century, and through the utilisation of new data on exchange rates and trade flows contributes to our understanding of the development of trade and its impact on the integration of Irish markets in the eighteenth and early nineteenth centuries, a period of rapid Irish economic development.