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The Restoration of the Gold Standard after the US Civil War: A Volatility Analysis

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  • Max Meulemann
  • Martin Uebele
  • Bernd Wilfling

Abstract

Using a Markov-switching GARCH model this paper analyzes the volatility evolution of the greenback's price in gold from after the Civil War until the return to gold convertibility in 1879. The econometric inference associated with our methodology indicates a switch to a regime of low volatility roughly seven months before the actual resumption. Since this empirical finding is most likely to be reconciled with a change in market expectations, we conclude that expectations affected the exchange rate more than fundamentals. Our analysis also demonstrates that regime switches in the volatility of exchange rates may refl ect historical events that remain undiscovered otherwise.

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File URL: http://www1.wiwi.uni-muenster.de/cqe/forschung/publikationen/cqe-working-papers/CQE_WP_20_2011.pdf
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Bibliographic Info

Paper provided by Center for Quantitative Economics (CQE), University of Muenster in its series CQE Working Papers with number 2011.

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Length: 33 pages
Date of creation: Feb 2011
Date of revision:
Handle: RePEc:cqe:wpaper:2011

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Keywords: Monetary history; 19th century; USA; greenback; Markov-switching GARCH models;

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  1. Robert P. Flood & Peter M. Garber, 1983. "A Model of Stochastic Process Switching," NBER Working Papers 0626, National Bureau of Economic Research, Inc.
  2. Froot, Kenneth & Obstfeld, Maurice, 1991. "Exchange Rate Dynamics Under Stochastic Regime Shifts: A Unified Approach," CEPR Discussion Papers 522, C.E.P.R. Discussion Papers.
  3. Kristen L. Willard & Timothy W. Guinnane & Harvey S. Rosen, 1996. "Turning Points in the Civil War: Views from the Greenback Market," NBER Working Papers 5381, National Bureau of Economic Research, Inc.
  4. Officer, Lawrence H., 1981. "The Floating Dollar in the Greenback Period: A Test of Theories of Exchange-Rate Determination," The Journal of Economic History, Cambridge University Press, vol. 41(03), pages 629-650, September.
  5. Gregor W. Smith & R. Todd Smith, 1988. "Stochastic Process Switching and the Return to Gold, 1925," Working Papers 723, Queen's University, Department of Economics.
  6. Wilfling, Bernd, 2009. "Volatility regime-switching in European exchange rates prior to monetary unification," Journal of International Money and Finance, Elsevier, vol. 28(2), pages 240-270, March.
  7. Gregor W. Smith & R. Todd Smith, 1996. "Greenback-Gold Returns and Expectations of Resumption, 1862-1879," Working Papers 1255, Queen's University, Department of Economics.
  8. Gelman, Sergey & Wilfling, Bernd, 2009. "Markov-switching in target stocks during takeover bids," Journal of Empirical Finance, Elsevier, vol. 16(5), pages 745-758, December.
  9. De Grauwe, Paul & Dewachter, Hans & Veestraeten, Dirk, 1999. "Price dynamics under stochastic process switching: some extensions and an application to EMU1," Journal of International Money and Finance, Elsevier, vol. 18(2), pages 195-224, February.
  10. Calomiris, Charles W, 1994. "Price and Exchange Rate Determination during the Greenback Suspension," Oxford Economic Papers, Oxford University Press, vol. 46(2), pages 344, April.
  11. Sutherland, Alan, 1995. "State- and time-contingent switches of exchange rate regime," Journal of International Economics, Elsevier, vol. 38(3-4), pages 361-374, May.
  12. Dueker, Michael J, 1997. "Markov Switching in GARCH Processes and Mean-Reverting Stock-Market Volatility," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(1), pages 26-34, January.
  13. Wilfling, Bernd & Maennig, Wolfgang, 2001. "Exchange rate dynamics in anticipation of time-contingent regime switching: modelling the effects of a possible delay," Journal of International Money and Finance, Elsevier, vol. 20(1), pages 91-113, February.
  14. Charles W. Calomiris, 1992. "Greenback Resumption and Silver Risk: The Economics and Politics of Monetary Regime Change in the United States, 1862-1900," NBER Working Papers 4166, National Bureau of Economic Research, Inc.
  15. Miller, Marcus & Sutherland, Alan, 1994. "Speculative Anticipations of Sterling's Return to Gold: Was Keynes Wrong?," Economic Journal, Royal Economic Society, vol. 104(425), pages 804-12, July.
  16. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867-1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, May.
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