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International Adjustment Under the Classical Gold Standard: Evidence for the U.S. and Britain, 1879-1914

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  • Charles W. Calomiris
  • R. Glenn Hubbard

Abstract

Links between disturbances in financial markets and those in real activity have long been the focus of studies of economic fluctuations during the period prior to World War I. We emphasize that domestic autonomy was substantially limited by internationally integrated markets for goods and capital. Such findings are important for studying business cycles during the period; for example, when prices are flexible, observed cyclical movements can be related to a credit-market transmission of deflationary shocks. Recent studies of the classical gold standard have revived interest in the process by which macroeconomic shocks were transmitted internationally during this period. The principal competing approaches - the "price-specie- flow," mechanism and the more modem "internationalist" view - differ according to the means by which international equilibrium is reestablished after a disturbance occurs in capital, money, or commodity markets. We present and interpret separate pieces of evidence on gold flows, interest rates, and selected commodity prices, all of which shed light on the alternative assumptions employed in the price-specie-flow and modern approaches. We employ a monthly data set for the U.S. and Britain for the pre-World War 1 frameworks. Using the "structural VAR" approach of Bernanke and Sims, we compare the actual historical importance of shocks and the observed patterns of short-run adjustment to shocks with the prediction of each of the two models. The evidence supports the "internationalist" view of close international linkages over the "specie-flow" view of circuitous linkages and domestic autonomy in money and capital markets.

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File URL: http://www.nber.org/papers/w2206.pdf
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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2206.

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Date of creation: Apr 1987
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Publication status: published as Bauoumi, T., B. Eichengreen and M. Taylor (eds.) Modern Perspectives on the Gold Standard. New York: Cambridge University Press, 1996.
Handle: RePEc:nbr:nberwo:2206

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  1. Bernanke, Ben S., 1986. "Alternative explanations of the money-income correlation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 49-99, January.
  2. Bernanke, Ben S, 1981. "Bankruptcy, Liquidity, and Recession," American Economic Review, American Economic Association, vol. 71(2), pages 155-59, May.
  3. Blinder, Alan S, 1987. "Credit Rationing and Effective Supply Failures," Economic Journal, Royal Economic Society, vol. 97(386), pages 327-52, June.
  4. Deardorff, Alan V, 1979. "One-Way Arbitrage and Its Implications for the Foreign Exchange Markets," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 351-64, April.
  5. Garber, Peter M, 1986. "Nominal Contracts in a Bimetallic Standard," American Economic Review, American Economic Association, vol. 76(5), pages 1012-30, December.
  6. Officer, Lawrence H, 1986. "The Efficiency of the Dollar-Sterling Gold Standard, 1890-1908," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1038-73, October.
  7. J. Bradford De Long & Lawrence H. Summers, 1984. "The Changing Cyclical Variability of Economic Activity in the United States," NBER Working Papers 1450, National Bureau of Economic Research, Inc.
  8. Clark, Truman A, 1986. "Interest Rate Seasonals and the Federal Reserve," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 76-125, February.
  9. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-76, June.
  10. Miron, Jeffrey A, 1986. "Financial Panics, the Seasonality of the Nominal Interest Rate, and theFounding of the Fed," American Economic Review, American Economic Association, vol. 76(1), pages 125-40, March.
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Cited by:
  1. Charles W. Calomiris & Joseph R. Mason, 2005. "Resolving the puzzle of the underissuance of national bank notes," Working Papers 05-19, Federal Reserve Bank of Philadelphia.

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