Domestic exchange rate determination in Renaissance Florence

• Published in: Cliometrica Vol. 11; no. 3; pp. 405 - 445
• Main Authors: Booth, G. Geoffrey, Chang, Sanders S.
• Format: Journal Article
• Language: English
• Published: Berlin/Heidelberg Springer Berlin Heidelberg 01-09-2017; Springer Nature B.V
• Subjects: Econometrics; Economic models; Economic Theory/Quantitative Economics/Mathematical Methods; Economics; Economics and Finance; Finance; Foreign exchange rates; History; History of Economic Thought/Methodology; Insurance; Management; Monetary systems; Original Paper; Statistics for Business; P12; Exchange rates; Money changing; Evolutionary stability; G10; G21; LIBOR; Renaissance Florence; N23
• ISSN: 1863-2505; 1863-2513
• DOI: 10.1007/s11698-016-0146-5

We explore the price-setting protocol used by the money-changers guild, the
Arte del Cambio
, to set the exchange rate between domestic gold and silver coins in Renaissance Florence, a precursor in purpose and set-up to the contemporary system of posting interest rates. We show that the protocol is evolutionarily stable and designed to converge to the efficient price, which had important implications to the political economy of Florence and the stability of its monetary system. We also show that the predicted dynamics of convergence are consistent with surviving exchange rates from 1389 to 1432, thereby linking the empirical properties of the historical data to the institutional features of the guild that generated them.