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Back to gold: Sterling in 1925

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  • Gerlach, Stefan
  • Kugler, Peter

Abstract

Expectations of Sterling returning to Gold have been disregarded in empirical work on the US dollar - Sterling exchange rate in the early 1920s. We incorporate such considerations in a PPP model of the exchange rate, letting the probability of a return to gold follow a logistic function. We draw several conclusions: (i) the PPP model works well from spring 1919 to spring 1925; (ii) wholesale prices outperform consumer prices; (iii) allowing for a return to gold leads to a higher speed of adjustment of the exchange rate to PPP; (iv) interest rate differentials and the relative monetary base are crucial determinants of the expected return to gold; (v) the probability of a return to Gold peaked at about 72% in late 1924 and but fell to about 60% in early 1925; and (vi) our preferred model does not support the Keynes' view that Sterling was overvalued after the return to gold.

Suggested Citation

  • Gerlach, Stefan & Kugler, Peter, 2015. "Back to gold: Sterling in 1925," CFS Working Paper Series 515, Center for Financial Studies (CFS).
    • Handle: RePEc:zbw:cfswop:515
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    References listed on IDEAS

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    1. John Redmond, 1984. "The Sterling Overvaluation in 1925. A Multilateral Approach," Economic History Review, Economic History Society, vol. 37(4), pages 520-532, November.
    2. S. C. Tsiang, 1959. "Fluctuating Exchange Rates in Countries with Relatively Stable Economies: Some European Experiences after World War I," IMF Staff Papers, Palgrave Macmillan, vol. 7(2), pages 244-273, October.
    3. Smith, Gregor W & Smith, R Todd, 1990. "Stochastic Process Switching and the Return to Gold, 1925," Economic Journal, Royal Economic Society, vol. 100(399), pages 164-175, March.
    4. J. Redmond, 1989. "Was sterling overvalued in 1925? A comment," Economic History Review, Economic History Society, vol. 42(1), pages 87-89, February.
    5. Clements, Kenneth W. & Frenkel, Jacob A., 1980. "Exchange rates, money, and relative prices: The dollar-pound in the 1920s," Journal of International Economics, Elsevier, vol. 10(2), pages 249-262, May.
    6. K. G. P. Matthews, 1986. "Was Sterling Overvalued in 192s?," Economic History Review, Economic History Society, vol. 39(4), pages 572-587, November.
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    More about this item

    Keywords

    Gold Standard; Sterling; exchange rate; PPP; expectations;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • N1 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations

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