Hostname: page-component-cd9895bd7-hc48f Total loading time: 0 Render date: 2024-12-26T20:21:35.004Z Has data issue: false hasContentIssue false
  • English
  • Français

Testing the interest-parity condition with Irving Fisher's example of Indian rupee and sterling bonds in the London financial market, 1869–1906

Published online by Cambridge University Press:  10 January 2019

Nils Herger
Nils Herger*
Affiliation:
Study Center Gerzensee
*
N. Herger, Study Center Gerzensee, Dorfstrasse 2, PO Box 21, 3115 Gerzensee, Switzerland, email: nils.herger@szgerzensee.ch.
Get access Rights & Permissions [Opens in a new window]

Abstract

Following the pioneering work of Irving Fisher, this article assesses the uncovered interest-parity (UIP) condition by comparing Indian interest and exchange rates during the 1869 to 1906 period. The Indian case provides a good example of the UIP condition, since Indian rupee and sterling bonds were simultaneously traded in the London financial market and subject to negligible default risks. Large deviations from the UIP condition arose when India suffered from pervasive levels of uncertainty about the future of its silver-based currency system. Otherwise, a relatively close correlation arises between sterling-to-rupee interest-rate differences and exchange-rate changes.

Keywords

IndiaIrving Fishersilver currencyuncovered interest parityUIP puzzle

JEL classification

N13: Europe: Pre-1913 F31: Foreign Exchange N23: Europe: Pre-1913
Type
Articles
Information
Financial History Review , Volume 26 , Issue 1 , April 2019 , pp. 21 - 42
Copyright
Copyright © European Association for Banking and Financial History e.V. 2019 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

This article has benefited from insightful comments by the editor and two anonymous referees. The usual disclaimer applies.

References

Aysun, U. and Lee, S. (2014). Can time-varying risk premiums explain the excess returns in the interest parity condition? Emerging Markets Review, 18, pp. 78–100.Google Scholar
Cassis, Y. (2010). Capitals of Capital: The Rise and Fall of International Financial Centres 1780–2009, 2nd edn. Cambridge: Cambridge University Press.Google Scholar
Chaboud, A. P. and Wright, J. H. (2005). Uncovered interest parity: it works, but not for long. Journal of International Economics, 66, pp. 349–62.Google Scholar
Chinn, M. D. (2006). The (partial) rehabilitation of the interest rate parity in the floating era: longer horizons, alternative expectations, and emerging markets. Journal of International Money and Finance, 25, pp. 7–21.Google Scholar
Clare, G. (1895). The ABC of the Foreign Exchanges: A Practical Guide, 2nd edn. London: Macmillan and Co.Google Scholar
Coleman, A. (2012). Uncovering uncovered interest parity during the classical gold standard era, 1888–1905. North American Journal of Economics and Finance, 23, pp. 20–37.Google Scholar
Dadachanji, B. E. (1931), History of Indian Currency and Exchange, 2nd edn. Bombay: D. B. Taraporevala Sons and Co.Google Scholar
Dimand, R.W. (1999). Irving Fisher and the Fisher relation: setting the record straight. Canadian Journal of Economics, 32, pp. 744–50.Google Scholar
Dimand, R. W. and Gomez Betancourt, R. (2012). Irving Fisher's Appreciation and Interest (1896) and the Fisher Relation. Journal of Economic Perspectives, 26, pp. 185–96Google Scholar
Duffie, D. and Stein, J. C. (2015). Reforming LIBOR and other financial market benchmarks. Journal of Economic Perspectives, 29, pp. 191–212.Google Scholar
Eichengreen, B. (2008). Globalizing Capital: A History of the International Monetary System. Princeton, NJ: Princeton University Press.Google Scholar
Engel, C. (2014). Exchange rates and interest parity. In Gopinath, G., Helpman, E. and Rogoff, K. (eds.), Handbook of International Economics, vol. 4. Amsterdam: Elsevier.Google Scholar
Fama, E. F. (1984). Forward and spot exchange rates. Journal of Monetary Economics, 14, pp. 319–38.Google Scholar
Fisher, I. (1896). Appreciation and Interest. New York: Macmillan and Co.Google Scholar
Fisher, I. (1930). The Theory of Interest. New York: Macmillan and Co.Google Scholar
Flandreau, M. and Oosterlinck, K. (2012). Was the emergence of the international gold standard expected? Evidence from Indian Government securities. Journal of Monetary Economics, 59, pp. 249–69.Google Scholar
Flood, R. P. and Rose, A. K. (1996). Fixes: of the forward discount puzzle. Review of Economics and Statistics, 78, pp. 748–52.Google Scholar
Friedman, M. and Schwarz, A. (1963). A Monetary History of the United States, 1867–1960. Princeton, NJ: Princeton University Press.Google Scholar
Goodhart, C. A. E. (1969). The New York Money Market and the Finance of Trade, 1900–1913. Cambridge, MA: Harvard University Press.Google Scholar
Haupt, O. (1890). La Hausse de l'argent et l'emprunt indien 4.5% en roupies. Paris: Truchy.Google Scholar
Herger, N. (2018). Interest-parity conditions during the era of the classical gold standard (1880–1914): evidence from the investment demand for bills of exchange in Europe. Swiss Journal of Economics and Statistics, forthcoming.Google Scholar
Ismailov, A. and Rossi, B. (2018). Uncertainty and deviations from uncovered interest rate parity. Journal of International Money and Finance, forthcoming.Google Scholar
Keynes, J. M. (1913). Indian Currency and Finance. London: Macmillan and Co.Google Scholar
Laughlin, L. J. (1896). The History of Bimetallism in the United States. New York: D. Appleton and Co.Google Scholar
Lewis, K. K. (1995). Puzzles in international financial markets. In Grossman, G. M. and Rogoff, K. (eds.), Handbook of International Economics, vol. 3. Amsterdam: Elsevier.Google Scholar
Li, D., Ghoshray, A. and Morley, B. (2012). Measuring the risk premium in uncovered interest parity using the component GARCH-M model. International Review Economics and Finance, 24, pp. 167–76.Google Scholar
Lothian, J. R., Pownall, R. A. J. and Koedijk, K. G. (2013). I discovered the peso problem: Irving Fisher and the UIP puzzle. Journal of International Money and Finance, 38, pp. 5–17.Google Scholar
New York Times (1897). Indian exchange suspended. 2 September 1897.Google Scholar
Niehans, J. (1990). A History of Economic Theory: Classic Contributions, 1720–1980. Baltimore: Johns Hopkins University Press.Google Scholar
Obstfeld, M. and Taylor, A.M. (2004). Global Capital Markets. Cambridge: Cambridge University Press.Google Scholar
Sarantis, N. (2006). Testing the uncovered interest parity using traded volatility, a time-varying risk premium and heterogeneous expectations. Journal of International Money and Finance, 25, pp. 1168–86.Google Scholar
Sarkar, J. (1917). Economics of British India, 4th edn. Calcutta: Longmans, Green and Co.Google Scholar
Tsay, R. S. (2005). Analysis of Financial Time Series, 2nd edn. Hoboken, NJ: John Wiley and Sons.Google Scholar
Wadia, P. A. and Joshi, G. N. (1926), Money and the Money Market in India. London: Macmillan and Co.Google Scholar