This paper presents an empirical analysis of long-run purchasing power parity (PPP) during the 1920s float, using recently developed methodology on the cointegration of economic time series. Our results are generally supportive of PPP as a long-run equilibrium condition on which exchange rates tended to converge over the period. For dollar-sterling, however, there is some evidence of a non-stationary drift away from fundamentals during the last year or so before Britain's return to the Gold Standard, perhaps due to speculation. Our results also appear to reconcile some apparently conflicting evidence in the literature. © 1988.
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