Stochastic Process Switching and the Return to Gold, 1925

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Abstract
We present numerical estimates of the effect on the dollar/sterling exchange rate in the early 1920s of anticipations of the return to the gold standard at pre-war parity in the U.K. These measures are calculated using a weak version of the monetary model of the exchange rate but are consistent with any exchange-rate fundamentals which follow a random walk with drift. Contrary to some contemporary views, the appreciation of the sterling prior to April 1925 appears to have been due mainly to fundamentals (such as restrictive monetary policy) rather than to the expectation of a change in regime.
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