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Are Hard Pegs Ever Credible in Emerging Markets? Evidence from the Classical Gold Standard

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Kris James Mitchener
Marc D. Weidenmier

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Abstract

Using a new database of weekly sovereign debt prices of paper currency and pound sterling (or gold) denominated debt, we identify the currency-risk component of sovereign yield spreads for nine of the largest emerging market borrowers for the period 1870-1913. Five years after a country joined the gold standard, paper currency bonds traded at significantly higher interest rates (more than 400 basis points on average) than a country’s foreign currency debt denominated in pound sterling. Investors also expected exchange rates to fall by roughly 20 percent even after emerging market borrowers had joined the gold standard. The presence of persistent positive currency risk premiums long after gold standard adoption suggests that hard pegs for emerging market borrowers may never be fully credible.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15401.

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Date of creation: Oct 2009
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Handle: RePEc:nbr:nberwo:15401

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F2 - International Economics - - International Factor Movements and International Business
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
N10 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations - - - General, International, or Comparative
N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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  2. Michael D. Bordo & Hugh Rockoff, 1996. "The Gold Standard as a `Good Housekeeping Seal of Approval'," NBER Working Papers 5340, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. 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)
  4. Bordo, Michael D. & Rockoff, Hugh, 1996. "The Gold Standard as a ?Good Housekeeping Seal of Approval?," The Journal of Economic History, Cambridge University Press, vol. 56(02), pages 389-428, June. [Downloadable!]
  5. Bordo, Michael D. & Murshid, Antu Panini, 2006. "Globalization and changing patterns in the international transmission of shocks in financial markets," Journal of International Money and Finance, Elsevier, vol. 25(4), pages 655-674, June. [Downloadable!] (restricted)
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  6. Moritz Schularick & Niall Ferguson, 2005. "“The Thin Film Of Gold”: The Limits Of Monetary Commitments," Macroeconomics 0509009, EconWPA. [Downloadable!]
  7. Wesley C. Mitchell, 1898. "Resumption of Specie Payments in Austria-Hungary," Journal of Political Economy, University of Chicago Press, vol. 7, pages 106. [Downloadable!] (restricted)
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