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"Water Seeks a Level": Modeling Bimetallic Exchange Rates and the Bimetallic Band

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  • Flandreau, Marc R

Abstract

Arbitrage costs are usually treated as a mere footnote in formal analyses of bimetallism. At the same time, recent empirical research has demonstrated their key importance, since they produced a "bimetallic band". This paper provides the first model of bimetallism that takes this explicitly into account and uses it to explain a number of stylized features of the French bimetallic experience 1850-1870. First, the model explains the association between the location of the price ratio within its band and the nature (either cross or joint) of specie flows. Second, it explains the correlation between bimetallic exchange rates and the bimetallic ratio. And third, it explains the two-humps distribution of the bimetallic ratio. This analysis leads to a reconsideration of bimetallism: the fluctuations of the price ratio are no longer evidence of the collapse of bimetallism, but are part of the normal functioning of a bimetallic system.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 34 (2002)
Issue (Month): 2 (May)
Pages: 491-519

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Handle: RePEc:mcb:jmoncb:v:34:y:2002:i:2:p:491-519

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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References

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  1. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  2. Friedman, Milton, 1990. "The Crime of 1873," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1159-94, December.
  3. Friedman, Milton, 1990. "Bimetallism Revisited," Journal of Economic Perspectives, American Economic Association, vol. 4(4), pages 85-104, Fall.
  4. Dumas, Bernard, 1992. "Dynamic Equilibrium and the Real Exchange Rate in a Spatially Separated World," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 153-80.
  5. Oppers, S.E., 1993. "Arbitrage in Bimetallic Money Supplies: Evidence from the Exchange Rate," Working Papers 338, Research Seminar in International Economics, University of Michigan.
  6. Stefan E. Oppers, 1995. "A Model of the Bimetallic System," IMF Working Papers 95/144, International Monetary Fund.
  7. Barro, Robert J, 1979. "Money and the Price Level under the Gold Standard," Economic Journal, Royal Economic Society, vol. 89(353), pages 13-33, March.
  8. Rolnick, Arthur J & Weber, Warren E, 1986. "Gresham's Law or Gresham's Fallacy?," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 185-99, February.
  9. Arthur J. Rolnick & Warren E. Weber, 1986. "Gresham's law or Gresham's fallacy?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 17-24.
  10. Salant, Stephen W & Henderson, Dale W, 1978. "Market Anticipations of Government Policies and the Price of Gold," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 627-48, August.
  11. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476.
  12. Kreps, David M., 1990. "Game Theory and Economic Modelling," OUP Catalogue, Oxford University Press, number 9780198283812.
  13. Garber, Peter M, 1986. "Nominal Contracts in a Bimetallic Standard," American Economic Review, American Economic Association, vol. 76(5), pages 1012-30, December.
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Cited by:
  1. Esteves, Rui Pedro & Reis, Jaime & Ferramosca, Fabiano, 2009. "Market Integration in the Golden Periphery. The Lisbon/London Exchange, 1854-1891," Explorations in Economic History, Elsevier, vol. 46(3), pages 324-345, July.
  2. repec:spo:wpecon:info:hdl:2441/324 is not listed on IDEAS
  3. Marc Flandreau & Kim Oosterlinck, 2011. "Was the Emergence of the International Gold Standard Expected? Melodramatic Evidence from Indian Government Securities," Working Papers 0005, European Historical Economics Society (EHES).
  4. Flandreau, Marc & Sussman, Nathan, 2004. "Old Sins: Exchange Rate Clauses and European Foreign Lending in the 19th Century," CEPR Discussion Papers 4248, C.E.P.R. Discussion Papers.
  5. Flandreau, Marc & Oosterlinck, Kim, 2012. "Was the emergence of the international gold standard expected? Evidence from Indian Government securities," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 649-669.
  6. Nathan Sussman & Marc Flandreau, 2004. "Old sins. Exchange Clauses and European Foreign Lending in the 19th Century," Sciences Po publications n°4248, Sciences Po.

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