Price Convergence Through a Financial Network: Does Financial Integration Impact Price Integration in Real Sectors?

Zhihao Xu, PhD Candidate from the University of California, Los Angeles presents his paper: “Price Convergence Through a Financial Network: Does Financial Integration Impact Price Integration in Real Sectors?”

How does financial integration impact price integration in real sectors? Using newly hand-collected data from a domestic exchange market during the Chinese Civil War (1945-1949), Zhihao Xu of UCLA Economics models the connection between these two integrations measured respectively by capital flow costs (or domestic exchange rates) and commodity relative prices across cities. He uses battle shocks to a financial hub in the exchange network to identify the impact of exchange rates on price convergence between a city pair connected to the hub. He finds that (1) city pairs with a direct domestic exchange link exhibited faster commodity price convergence than others; (2) battles around financial hubs tended to raise capital flow costs between a connected city pair, decelerating price convergence by 4% - 8%; (3) a weak form of purchasing power parity holds: a 1% depreciation in the domestic exchange rates was associated with a 0.2% - 0.3% reduction in inflation rate differentials; and (4) a higher inflation rate did not impede or strengthen the price convergence channel via domestic exchanges. These results imply that China’s financial development was more sophisticated than expected relative to its status as an agricultural economy in the early 20th century.

Chair: Professor Debin Ma (Institute of Economic Research, Hitotsubashi University), Co-Director of the International Society for Quantitative History

This webinar is a joint event with the YSI Economic History Graduate Webinar supported by The Young Scholars Initiative, from the Institute for New Economic Thinking in New York, and the European Historical Economics Society (EHES).

Special thanks goes to all organizers of the YSI Economic History Graduate Webinar Series: Ester Treccan (University Carlos 3 Madrid), Jordi Caum Julio (University of Barcelona), Maylis Avaro (University of Oxford), and Xabier Garcia Fuente (University of Barcelona).