Monetary Policy under the Classical Gold Standard (1870s - 1914)
AbstractDrawing on monthly data for 12 European countries, this paper asks whether countries under the Classical Gold Standard followed the so-called “rules of the game” and, if so, whether the external constraint implied by these rules was more binding for the periphery than for the core. Our econometric focus is a probit estimation of the central bank discount rate behaviour. Three main findings emerge: First, all countries followed specific rules but rules were different for core countries as opposed to peripheral countries. The discount rate decisions of core countries were motivated by keeping the exchange-rate within the gold points. In stark contrast, the discount rate decisions of peripheral countries reflected changes in the domestic cover ratio. The main reason for the different rules was the limited effectiveness of the discount rate tool for peripheral countries which resulted in more frequent gold point violations. Consequently, peripheral countries relied on high reserve levels and oriented their discount rate policy towards maintaining the reserve level. Second, there was a substantial amount of discretionary monetary policy left to all countries, even though we find that core countries enjoyed marginally more liberty in setting their discount rate than peripheral countries. Third, interest rate decisions were influenced more by Berlin than by London, suggesting that the European branch of the Classical Gold Standard was less London-centered than hitherto assumed.
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Bibliographic InfoPaper provided by CHERRY, c/o Department of Economics, University of York in its series Centre for Historical Economics and Related Research at York (CHERRY) Discussion Papers with number 10/01.
Date of creation: Jul 2010
Date of revision:
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Postal: c/o Sue Bowden, Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom
Phone: (0)1904 323776
Fax: (0)1904 323759
Web page: http://www.york.ac.uk/economics/research/research-clusters/cherry/
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gold standard; rules of the game; balance-of-payment adjustment; central banking;
Find related papers by JEL classification:
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- F3 - International Economics - - International Finance
- N13 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Europe: Pre-1913
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-07-17 (All new papers)
- NEP-CBA-2010-07-17 (Central Banking)
- NEP-HIS-2010-07-17 (Business, Economic & Financial History)
- NEP-IFN-2010-07-17 (International Finance)
- NEP-MAC-2010-07-17 (Macroeconomics)
- NEP-MON-2010-07-17 (Monetary Economics)
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