"Water Seeks a Level": Modeling Bimetallic Exchange Rates and the Bimetallic Band
Arbitrage costs are usually treated as a mere footnote in formal analyses of bimetallism. At the same time, recent empirical research has demonstrated their key importance, since they produced a "bimetallic band". This paper provides the first model of bimetallism that takes this explicitly into account and uses it to explain a number of stylized features of the French bimetallic experience 1850-1870. First, the model explains the association between the location of the price ratio within its band and the nature (either cross or joint) of specie flows. Second, it explains the correlation between bimetallic exchange rates and the bimetallic ratio. And third, it explains the two-humps distribution of the bimetallic ratio. This analysis leads to a reconsideration of bimetallism: the fluctuations of the price ratio are no longer evidence of the collapse of bimetallism, but are part of the normal functioning of a bimetallic system.
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Volume (Year): 34 (2002)
Issue (Month): 2 (May)
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