Working Paper: NBER ID: w9261
Authors: George J. Hall
Abstract: I estimate two factor models of Swiss exchange rates during the FirstWorldWar. I have data for five of the primary belligerents: Britain, France, Italy, Germany, and Austria-Hungary. At the outbreak of the war, these nations suspended convertibility of their currencies into gold with the promise that after the war each would restore convertibility at the old par. However, once convertibility was suspended, the value of each currency depended on the outcome of the war. I decompose exchange rate movements into a common trend, a common factor, and country-specific factors. Movements in the common trend are consistent with the quantity theory of money. The common factor contains information on contemporaries' expectations about the war's resolution. Innovations to this common factor are correlated with time series on soldiers killed, wounded, and taken prisoner.
Keywords: No keywords provided
JEL Codes: N1; E4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| innovations to the common factor (O35) | net body count series (C59) |
| innovations to the common factor (O35) | net prisoners of war series (H56) |
| favorable military news (H56) | increase in value of Allied currencies (F31) |
| net body count series (C59) | increase in value of Allied currencies (F31) |
| net prisoners of war series (H56) | decrease in value of Allied currencies (F31) |