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Sovereign Risk, Credibility and the Gold Standard: 1870-1913 versus 1925-31

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Author Info
Maurice Obstfeld (University of California, Berkeley and CEPR and NBER)
Alan Taylor (University of California at Davis, and NBER)

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Abstract

What determines sovereign risk? We study the London bond market from the 1870s to the 1930s. Our findings support conventional wisdom concerning the low credibility of the interwar gold standard. Before 1914 gold standard adherence effectively signalled credibility and shaved up to 30 basis points from country borrowing spreads. In the 1920s, however, simply resuming prewar gold parities was insufficient to secure benefits. Countries that devalued before resumption were treated more favorably, and markets scrutinized other signals. Public debt and British Empire membership were important determinants of spreads after World War One, but not before.

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Paper provided by Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley in its series Center for International and Development Economics Research, Working Paper Series with number 1029.

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Date of creation: 27 Jun 2006
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Handle: RePEc:cdl:ciders:1029

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Keywords: Gold standard sovereign risk credibility monetary regimes exchange rates

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  1. Michael D. Bordo & Anna J. Schwartz, 1997. "Monetary Policy Regimes and Economic Performance: The Historical Record," NBER Working Papers 6201, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Hawke, G R, 1975. "Income Estimation from Monetary Data: Further Explorations," Review of Income and Wealth, Blackwell Publishing, vol. 21(3), pages 301-07, September.
  3. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Blackwell Publishing, vol. 58(2), pages 277-97, April. [Downloadable!] (restricted)
  4. Christopher M. Meissner, 2002. "A New World Order: Explaining the Emergence of the Classical Gold Standard," NBER Working Papers 9233, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Peter L. Rousseau & Richard Sylla, 2001. "Financial Systems, Economic Growth, and Globalization," Working Papers 0119, Department of Economics, Vanderbilt University. [Downloadable!]
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  6. Thomas J. Sargent, 1981. "Stopping moderate inflations: the methods of Poincaré and Thatcher," Working Papers 0, Federal Reserve Bank of Minneapolis. [Downloadable!]
  7. 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. [Downloadable!] (restricted)
  8. Drazen, Allan & Masson, Paul R, 1994. "Credibility of Policies versus Credibility of Policymakers," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 735-54, August. [Downloadable!] (restricted)
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  9. Bordo Michael D. & Kydland Finn E., 1995. "The Gold Standard As a Rule: An Essay in Exploration," Explorations in Economic History, Elsevier, vol. 32(4), pages 423-464, October. [Downloadable!] (restricted)
  10. Maurice Obstfeld & Alan M. Taylor, 2002. "Globalization and Capital Markets," NBER Working Papers 8846, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Matthew T. Jones and Maurice Obstfeld., 1997. "Saving, Investment, and Gold: A Reassessment of Historical Current Account Data," Center for International and Development Economics Research (CIDER) Working Papers C97-094, University of California at Berkeley.
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  12. Hugh Rockoff & Michael D. Bordo, 1996. "The Gold Standard as a "Good Housekeeping Seal of Approval"," Departmental Working Papers 199528, Rutgers University, Department of Economics. [Downloadable!]
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  13. Michael Bordo & Michael Edelstein & Hugh Rockoff, 1999. "Was Adherence to the Gold Standard a "Good Housekeeping Seal of Approval" During the Interwar Period?," NBER Working Papers 7186, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Michael D. Bordo & Lars Jonung, 1996. "Monetary Regimes, Inflation And Monetary Reform: An Essay in Honor of Axel Leijonhufvud," Departmental Working Papers 199407, Rutgers University, Department of Economics. [Downloadable!]
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Cited by:
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  1. Niall Ferguson & Moritz Schularick, 2005. "The Empire Effect: Country Risk in the First Age of Globalization, 1880-1913," Economic History 0509002, EconWPA. [Downloadable!]
  2. Prasanna Gai & Kang-yong Tan, 2004. "Good Housekeeping? Reputation, Fixed Exchange Rates, and the 'Original Sin' Problem," Working Papers 082004, Hong Kong Institute for Monetary Research. [Downloadable!]
  3. Michael D. Bordo & Christopher M. Meissner, 2005. "The Role of Foreign Currency Debt in Financial Crises: 1880-1913 vs. 1972-1997," NBER Working Papers 11897, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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