Financial Market Integration in the Early Modern Period in Spain: Results from a Threshold Error Correction Model Peter Bernholz Peter Kugler WWZ/Universität Basel Abstract This paper presents an empirical analysis of a dynamic adjustment of the exchange rate between the Spanish Ducado and the Dutch Groat in two different market places in Spain, namely Seville and Medina del Campo. We use annual data from 1564 to 1603 and a threshold vector error correction model. Our main finding is that deviations of up to 6 percent between the two market places were possible without leading to arbitrage operations. Larger deviations are disappearing within a year by a change of the exchange rate only in Medina del Campo. The asymmetric adjustment pattern is probably brought about by the fact that in Seville the silver market was very liquid given the large inflow from Latin America and that the costs of transportation on sea compared to those on land (as necessary to Medina del Campo) were lower. June 2008 1