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The "Thin Film Of Gold": Monetary Rules and Policy Credibility In Developing Countries

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  • Niall Ferguson
  • Moritz Schularick

Abstract

This paper asks whether developing countries can reap credibility gains from submitting policy to a strict monetary rule. Following earlier work, we look at the gold standard era (1880-1914) as a "natural experiment" to test whether adoption of a rule-based monetary framework such as the gold standard increased policy credibility. On the basis of the largest possible dataset covering almost sixty independent and colonial borrowers in the London market, we challenge the traditional view that gold standard adherence worked as a credible commitment mechanism that was rewarded by financial markets with lower borrowing costs. We demonstrate that in the poor periphery -- where policy credibility is a particularly acute problem -- the market looked behind "the thin film of gold". Our results point to a dichotomy: whereas country risk premia fell after gold adoption in developed countries, there were no credibility gains in the volatile economic and political environments of developing countries. History shows that monetary policy rules are no short-cut to credibility in situations where vulnerability to economic and political shocks, not time-inconsistency, are overarching concerns for investors.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13918.

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Date of creation: Apr 2008
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Publication status: published as European Review of Economic History (2012) 16 (4): 384-407. doi: 10.1093/ereh/hes006 First published online: October 19, 2012
Handle: RePEc:nbr:nberwo:13918

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Cited by:
  1. Volosovych, Vadym, 2011. "Measuring financial market integration over the long run: Is there a U-shape?," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1535-1561.
  2. repec:dgr:uvatin:2011018 is not listed on IDEAS
  3. Monique Reid, 2012. "Inflation Expectations of the Inattentive General Public," Working Papers 278, Economic Research Southern Africa.
  4. Grossman, Richard S. & Imai, Masami, 2009. "Japan's return to gold: Turning points in the value of the yen during the 1920s," Explorations in Economic History, Elsevier, vol. 46(3), pages 314-323, July.

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