Faculty Publications

The Dollar-Pound Exchange Rate During The First Nine Months Of World War II

Document Type

Article

Keywords

Exchange rates, The New York market for free sterling, World war II

Journal/Book/Conference Title

Atlantic Economic Journal

Volume

41

Issue

4

First Page

385

Last Page

404

Abstract

Between August 25, 1939 and June 7, 1940, there was a free market for British pounds in New York. German success at the outset of World War II caused the value of free sterling to fall relative to the official exchange rate. This imposed an externality that made it more difficult for Britain to finance the war. Eventually, the externality became large enough that Britain chose to take extreme measures to abolish it, even at the expense of tarnishing the reputation of London's financial markets. We collected daily data to investigate how the market reacted to war news and to policy changes. Using methods developed by Bai and Perron (Econometrica 66:47-78, 1998; Journal of Applied Econometrics 18:1-22, 2003), we find 17 breaks in the exchange rate. Fourteen are associated with military events and three are associated with policy changes. The episode illustrates how markets can fail to serve the public interest during times of war. © 2013 International Atlantic Economic Society.

Department

Department of Economics

Original Publication Date

12-1-2013

DOI of published version

10.1007/s11293-013-9380-4

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