ABSTRACT
This work investigates seasonal fluctuations of U.S. and British short term nominal interest rates, the dollar-sterling exchange rate and short term interest rate differentials between the United States and Britain during the period 1883-1913. Several recent studies have investigated the strong seasonal fluctuations of short term nominal interest rates in the United States and Britain during this period, but scant attention has been paid to comparing the seasonal patterns of interest rates in the two countries and to investigating the relationships between exchange rate movements and the short term nominal interest rate differentials between the United States and Britain during this period. In this study, significant differences are found in the seasonal patterns of short term nominal interest rate fluctuations in the United States and Britain. According to uncovered interest parity, interest rate differentials between two countries should be offset by expected exchange rate movements. It is found here that during the pre-World War I gold standard, seasonal movements in exchange rates did not tend to offset the seasonal fluctuations in interest rate differentials. The series of ex post returns from borrowing in Britain and investing in the United States which takes account of exchange rate movements shows much stronger seasonal fluctuations than the interest rate differentials between U.S. and British short term nominal interest rates.
