Exchange Rates and Prices in the Netherlands and Britain over the Past Four Centuries

The paper studies the long‐term stability of the purchasing‐power‐parity (PPP) relation using data for the Netherlands and Great Britain (earlier the Dutch Republic and England) from 1590 until 2020. We begin by investigating the behavior of the real exchange rate in rate‐of‐growth form finding strong evidence supporting long‐run relative PPP. Turning to price levels, we find evidence of mean‐reverting behavior over the whole period with one long‐lived shift in mean between 1788 and 1931. The myriad other factors that varied over this long period that might have affected the stability of the PPP relation do not appear to have mattered.