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Monetary regimes and statistical regularity: the Classical Gold Standard (1880-1913) through the lenses of Markov models

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  • Daniela Bragoli

    (Department of Economics and Social Sciences, Universita Cattolica del Sacro Cuore)

  • Camilla Ferretti

    (Department of Economics and Social Sciences, Universita Cattolica del Sacro Cuore)

  • Piero Ganugi

    (Department of Industrial Engineering, Universita degli Studi di Parma)

  • Giancarlo Ianulardo

    (Department of Economics, University of Exeter)

Abstract

We aim at characterizing the Classical Gold Standard period (CGS) in order to verify if it is endowed with statistical regularity. We study the statistical properties of two-state annual transition matrices of countries switching from a sound state to a crisis state focusing on Reinhart and Rogoff 2009 dataset on external debt crises. The CGS period is governed by homogeneity both in time and across statistical units: the Homogeneous Markov Chain Model holds whereas the Mover Stayer Model does not. Our work is linked to the literature on the CGS and credibility (Bordo and Rockoff 1996). We follow a pure statistical approach to highlight two decisive channels of the credibility mechanism. The first is the stabilization of the probability of default of sound countries. The second is the fact that the CGS makes periphery/deficit countries homogeneous to the core with respect to the probability of default. Both channels are decisive because poor developing countries can borrow at favorable conditions and finance a level of investment greater than their capacity of saving.

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File URL: http://people.exeter.ac.uk/cc371/RePEc/dpapers/DP1301.pdf
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Bibliographic Info

Paper provided by Exeter University, Department of Economics in its series Discussion Papers with number 1301.

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Date of creation: 2013
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Handle: RePEc:exe:wpaper:1301

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Keywords: Classical Gold Standard; Credibility; Time Homogeneous Markov Chain; Mover Stayer.;

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  1. Kris James Mitchener & Masato Shizume & Marc D. Weidenmier, 2008. "Why did Countries Adopt the Gold Standard? Lessons from Japan," Discussion Paper Series 228, Research Institute for Economics & Business Administration, Kobe University.
  2. Obstfeld, Maurice & Taylor, Alan M., 2003. "Sovereign Risk, Credibility and the Gold Standard: 1870-1913 versus 1925-31," Center for International and Development Economics Research, Working Paper Series qt6f15n0h0, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  3. Meissner, Christopher M., 2005. "A new world order: explaining the international diffusion of the gold standard, 1870-1913," Journal of International Economics, Elsevier, vol. 66(2), pages 385-406, July.
  4. Grossman, Herschel I & Van Huyck, John B, 1988. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," American Economic Review, American Economic Association, vol. 78(5), pages 1088-97, December.
  5. Michael D. Bordo, 1995. "The Gold Standard as a `Good Housekeeping Seal of Approval'," NBER Working Papers 5340, National Bureau of Economic Research, Inc.
  6. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
  7. 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.
  8. Kris James Mitchener & Marc D. Weidenmier, 2009. "Are Hard Pegs Ever Credible in Emerging Markets? Evidence from the Classical Gold Standard," NBER Working Papers 15401, National Bureau of Economic Research, Inc.
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