Market integration from the sixteenth century until World War I: Evidence from wheat markets

This study examines the evolution of market integration and globalization from the late 16th century to the early 20th century. For this purpose, I compile a new and comprehensive dataset on wheat prices, covering 63 cities and 11 countries across Europe, North America, and the Middle East. To build separate international and country-specific market integration indices over time, I estimate a dynamic factor model that decomposes the price movements of each city into international, country-specific, and city-specific components. The model imposes an orthogonality condition to distinguish international integration from country-specific integration and hence avoids double counting. In terms of the timing of market integration, the results suggest that it started early, with gradual but meandering gains from the 16th century on, which accelerated after the 1820s. As for the composition of the gains in integration, the findings indicate that they were predominantly international rather than country-specific. In terms of the geography of market integration, the results show that northwest Europe was at the epicenter, with North America catching up in the late 19th century but the Middle East and Iberia lagging behind.