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Effective Exchange Rates and the Classical Gold Standard Adjustment

  • Luis A. V. Cat�o
  • Solomos N. Solomou

Using a new international dataset of trade-weighed exchange rates, this paper highlights a neglected adjustment mechanism in the classical gold standard literature. Since gold-pegged countries traded extensively with economies operating more flexible monetary regimes and where parity change was a common adjustment device to systemic shocks, we show that such parity adjustments induced worldwide swings in nominal effective exchange rates. These translated into real exchange rate variations to which trade balances responded with an average elasticity of unity and in the direction of restoring external disequilibria. We conclude that some nominal exchange rate flexibility thus present in the pre-1914 system was instrumental to international payments adjustment.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 95 (2005)
Issue (Month): 4 (September)
Pages: 1259-1275

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Handle: RePEc:aea:aecrev:v:95:y:2005:i:4:p:1259-1275
Note: DOI: 10.1257/0002828054825565
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  1. Michael D. Bordo, 1993. "The gold standard, Bretton Woods and other monetary regimes: a historical appraisal," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 123-191.
  2. Ben S. Bernanke & Kevin Carey, 1996. "Nominal Wage Stickiness and Aggregate Supply in the Great Depression," NBER Working Papers 5439, National Bureau of Economic Research, Inc.
  3. Tamim Bayoumi and Barry Eichengreen., 1994. "The Stability of the Gold Standard and the Evolution of the International Monetary System," Center for International and Development Economics Research (CIDER) Working Papers C94-040, University of California at Berkeley.
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