PPP Presentation 10-09 - Testing for the Economic Impact of...

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Testing for the Economic Impact of the U.S. Constitution: Purchasing Power Parity Across the Colonies Versus Across the States, 1748-1811 Farley Grubb Economics Department, University of Delaware Research Associate, NBER Oct. 13, 2009 Abstract : The U.S. Constitution removed real and monetary trade barriers between the states. By contrast, these states when they were British colonies exercised considerable real and monetary sovereignty over their borders. Purchasing power parity is used to measure how much economic integration between the states was gained in the decades after the Constitution’s adoption compared with what existed among the same locations during the late colonial period. Using this measure, the short-run effect of the Constitution on economic integration was minimal. This may have been because the Constitution did not eliminate all the institutional barriers to interstate trade before 1812.
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U.S. Constitution [Drafted 1787; Adopted by Congress 1789] Article 1 of peace…
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No idea is more firmly planted in American history than the idea that one of the most difficult problems during the Confederation was that of barriers to trade between state and state. There had been such barriers in colonial times… Merrill Jensen, New Nation , p. 337 The ‘secret’ of American economic growth, English legal scholar Sir Henry Maine wrote in 1886, lay in ‘the [constitutional] prohibition against levying duties on commodities passing from State to State…. It secures to the producer the command of a free market over an enormous territory of vast natural wealth…’ Charles W. McCurdy, “American Law,” p. 631 I. The Colonies as a Benchmark for Comparison with the Post- Constitution States regarding Real and Monetary Trade Barriers A. Trade rules between colonies almost those adopted at the Constitutional Convention as the trade rules for the states. B. Degree of sovereignty exercised by the colonies over trade that crossed their borders. (i) Board of Trade Oversight (ii) Retaliatory Constraints (iii) Still much real and monetary autonomy II. Post-Constitution Trade Barriers Exercised Between the States A. Removed State Import and Export Duties at their Borders But: B. Excise taxes. [NY auction duties] C. Inspection laws. [Especially PA, MD, VA, and SC] D. Monetary wedges. [State Banks and SC Example]
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Purchasing Power Parity (PPP) Ex = exchange rate; P = price index; d = residual deviations from PPP; a = Colony/State A; b = Colony/State B. Absolute PPP: EX ab = P a/ P b Relative PPP: ln( EX ab) = ln( P a) – ln( P b) + d ln[( EX ab* P b)/ P a] = d A. Test if d is a stationary time series (if you can reject a unit root). [Expect d to be zero in the long-run. No time trend allowed.] B. If stationary, measure how fast d mean reverts to zero (its half-life). C. In Tables: ln( y t ) = ln[( EX ab* P b)/ P a] = d for colonies ln( y t ) = ln[( P b)/ P a] = d for states D. Data Needs: 1) Price Index for each Location 2) Exchange Rate between each Location 3) Time Span for Estimation
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Price Indices for NY, SC, PA, and Montreal
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