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Shooting on a Moving Target: Eyplaining European Bank Rates during the Interwar Period

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  • Kirsten Wandschneider
  • Nikolaus Wolf

Abstract

This paper describes the monetary policy response of countries during the inter-war period. How did central banks react to the Great Depression? How did countries balance the externals demands of the gold standard with domestic policy pressures? What was the optimal level of international policy coordination? We use weekly data over the period 1925-1936 to estimate central bank rate reaction functions for a panel of 22 countries during the inter-war gold standard. The estimates suggest to us changing objectives for monetary policy. Countries moved away from the sole objective of convertibility and towards a more ‘modern’ monetary policy based on exchange rate stabilization, but not yet output stabilization or even modern price level targeting. Importantly, this move to exchange rate stabilization was accompanied by the formation of monetary policy blocs around pre-existing economic relations. Countries’ interwar policy choices offer lessons for countries remaining in or choosing to join the European Monetary Union today.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2694.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2694

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Keywords: monetary policy; great depression; reaction functions;

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  1. Ritschl, Albrecht & Wolf, Nikolaus, 2003. "Endogeneity of Currency Areas and Trade Blocs: Evidence from the Inter-war Period," CEPR Discussion Papers 4112, C.E.P.R. Discussion Papers.
  2. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(2), pages 379-408, May.
  3. Silvana Tenreyro & Robert J. Barro, 2003. "Economic Effects of Currency Unions," NBER Working Papers 9435, National Bureau of Economic Research, Inc.
  4. Obstfeld, Maurice & Shambaugh, Jay C. & Taylor, Alan M., 2004. "The Trilemma in History: Tradeoffs among Exchange Rates, Monetary Policies, and Capital Mobility," Center for International and Development Economics Research, Working Paper Series, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkele qt4rq9v2rb, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  5. Michael D. Bordo & Pierre-Cyrille Hautcoeur, 2003. "Why didn't France follow the British Stabilization after World War One?," NBER Working Papers 9860, National Bureau of Economic Research, Inc.
  6. Kirsten Wandschneider, 2005. "The Stability of the Inter-war Gold Exchange Standard. Did Politics Matter?," Middlebury College Working Paper Series 0518, Middlebury College, Department of Economics.
  7. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2004. "Monetary Sovereignty, Exchange Rates, and Capital Controls: The Trilemma in the Interwar Period," IMF Staff Papers, Palgrave Macmillan, vol. 51(s1), pages 75-108, June.
  8. Alberto Alesina & Robert J. Barro, 2002. "Currency Unions," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(2), pages 409-436, May.
  9. Jeffrey A Frankel, 1993. "Is there a Currency Bloc in the Pacific?," RBA Annual Conference Volume, in: Adrian Blundell-Wignall (ed.), The Exchange Rate, International Trade and the Balance of Payments Reserve Bank of Australia.
  10. Stephen G. Cecchetti & RÛisÌn O'Sullivan, 2003. "The European Central Bank and the Federal Reserve," Oxford Review of Economic Policy, Oxford University Press, vol. 19(1), pages 30-43.
  11. Eichengreen, Barry & Irwin, Douglas A., 1995. "Trade blocs, currency blocs and the reorientation of world trade in the 1930s," Journal of International Economics, Elsevier, vol. 38(1-2), pages 1-24, February.
  12. Michael Bordo & Michael Edelstein, 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.
  13. Barry Eichengreen & Douglas A. Irwin, 1998. "The Role of History in Bilateral Trade Flows," NBER Chapters, in: The Regionalization of the World Economy, pages 33-62 National Bureau of Economic Research, Inc.
  14. Simmons, Beth A., 1996. "Rulers of the game: central bank independence during the interwar years," International Organization, Cambridge University Press, Cambridge University Press, vol. 50(03), pages 407-443, June.
  15. Eichengreen, Barry & Watson, Mark W & Grossman, Richard S, 1985. "Bank Rate Policy under the Interwar Gold Standard: A Dynamic Probit Model," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 95(379), pages 725-45, September.
  16. Feinstein, Charles H. & Temin, Peter & Toniolo, Gianni, 1997. "The European Economy Between the Wars," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198774815, October.
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