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The inter-war gold exchange standard: credibility and monetary independence

  • Bordo, Michael D.
  • MacDonald, Ronald

In this paper we analyze the operation of the inter-war gold exchange standard to see if the evident credibility of the system conferred on participating central banks the ability to pursue independent monetary policies. To answer this question we econometrically analyze two key parity, or arbitrage, conditions, namely uncovered interest rate parity and a yield gap relationship. We find that there were both long- and short-run deviations from the arbitrage conditions. The use to which this policy independence was put is analyzed in the context of a multivariate system, which includes reaction function variables.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 22 (2003)
Issue (Month): 1 (February)
Pages: 1-32

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Handle: RePEc:eee:jimfin:v:22:y:2003:i:1:p:1-32
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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  1. Campbell, John & Shiller, Robert, 1987. "Cointegration and Tests of Present Value Models," Scholarly Articles 3122490, Harvard University Department of Economics.
  2. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Technical Working Papers 0100, National Bureau of Economic Research, Inc.
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  4. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
  5. Søren Johansen & Katarina Juselius, 1992. "Identification of the Long-Run and the Short-Run Structure: An Application to the ISLM Model," Discussion Papers 92-04, University of Copenhagen. Department of Economics.
  6. Hendry, D.F. & Mizon, G.E., 1990. "Evaluating Dynamic Econometric Models By Encompassing The Var," Economics Series Working Papers 99102, University of Oxford, Department of Economics.
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  8. Ronald Macdonald, 1995. "Long-Run Exchange Rate Modeling: A Survey of the Recent Evidence," IMF Staff Papers, Palgrave Macmillan, vol. 42(3), pages 437-489, September.
  9. Hallwood, C. Paul & MacDonald, Ronald & Marsh, Ian W., 1997. "Crash! Expectational Aspects of the Departures of the United Kingdom and the United States from the Inter-War Gold Standard," Explorations in Economic History, Elsevier, vol. 34(2), pages 174-194, April.
  10. Lars E.O. Svensson, 1992. "Why Exchange Rate Bands? Monetary Independence in Spite of Fixed Exchange Rates," NBER Working Papers 4207, National Bureau of Economic Research, Inc.
  11. Eichengreen, Barry & Watson, Mark W & Grossman, Richard S, 1985. "Bank Rate Policy under the Interwar Gold Standard: A Dynamic Probit Model," Economic Journal, Royal Economic Society, vol. 95(379), pages 725-45, September.
  12. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  13. Michael Bordo & Michael Edelstein, 1999. "Was Adherence to the Gold Standard a "Good Housekeeping Seal of Approval" During the Interwar Period?," NBER Working Papers 7186, National Bureau of Economic Research, Inc.
  14. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  15. Ben S. Bernanke, 1986. "Alternative Explanations of the Money-Income Correlation," NBER Working Papers 1842, National Bureau of Economic Research, Inc.
  16. Granger, Clive W J, 1986. "Developments in the Study of Cointegrated Economic Variables," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 213-28, August.
  17. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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