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Was the Classical Gold Standard Credible on the Periphery? Evidence from Currency Risk

Published online by Cambridge University Press:  04 June 2015

Kris James Mitchener
Affiliation:
Professor of Economics, Department of Economics, Santa Clara University, 500 El Camino Real, Santa Clara, CA 95053-0385, Research Associate at the Centre for Competitive Advantage and the Global Economy and the National Bureau of Economic Research, and Research Fellow at the Centre for Economic and Policy Research. E-mail: kmitchener@scu.edu.
Marc D. Weidenmier
Affiliation:
Professor of Economics, Department of Economics, Claremont McKenna College, Claremont, CA 91711 and Research Associate at the National Bureau of Economic Research. E-mail: marc_weidenmier@cmc.edu.

Abstract

We use a standard metric from international finance, the currency risk premium, to assess the credibility of fixed exchange rates during the classical gold standard era. Theory suggests that a completely credible and permanent commitment to join the gold standard would have zero currency risk or no expectation of devaluation. We find that, even five years after a typical emerging-market country joined the gold standard, the currency risk premium averaged at least 220 basis points. Fixed-effects, panel-regression estimates that control for a variety of borrower-specific factors also show large and positive currency risk premia. In contrast to core gold standard countries, such as France and Germany, the persistence of large premia, long after gold standard adoption, suggest that financial markets did not view the pegs in emerging markets as credible and expected that they devaluation.

Type
Articles
Copyright
Copyright © The Economic History Association 2015 

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Footnotes

We thank Scott Potter, Julie Van Tighem, and Mindy Ngo for research assistance; Christian Echeverria, Aldo Musacchio, Luciano Pezzolo, Matthias Morys, Christian van Rysselberghe, and Gail Triner for assistance with data, and the National Science Foundation for financial support. We also thank Brock Blomberg, Richard Burdekin, Fabio Ghironi, James Nason, Helen Popper, Angela Redish, Hugh Rockoff, Tom Willett, and conference and seminar participants at the ASSA meetings, the Federal Reserve Bank of Atlanta Monetary History Workshop, Cambridge University, Stanford University, and the Political Economy of International Finance Meetings for comments and suggestions.

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