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"Water Seeks a Level": Modeling Bimetallic Exchange Rates and the Bimetallic Band

  • Flandreau, Marc R

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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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 34 (2002)
Issue (Month): 2 (May)
Pages: 491-519

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Handle: RePEc:mcb:jmoncb:v:34:y:2002:i:2:p:491-519
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Friedman, Milton, 1990. "The Crime of 1873," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1159-94, December.
  2. Oppers, S.E., 1993. "Arbitrage in Bimetallic Money Supplies: Evidence from the Exchange Rate," Working Papers 338, Research Seminar in International Economics, University of Michigan.
  3. Oppers, Stefan Erik, 2000. "A model of the bimetallic system," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 517-533, October.
  4. Flandreau, Marc, 1996. "Adjusting to the Gold Rush: Endogenous Bullion Points and the French Balance of Payments 1846-1870," Explorations in Economic History, Elsevier, vol. 33(4), pages 417-439, October.
  5. 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.
  6. Rolnick, Arthur J & Weber, Warren E, 1986. "Gresham's Law or Gresham's Fallacy?," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 185-99, February.
  7. Garber, Peter M, 1986. "Nominal Contracts in a Bimetallic Standard," American Economic Review, American Economic Association, vol. 76(5), pages 1012-30, December.
  8. Kreps, David M., 1990. "Game Theory and Economic Modelling," OUP Catalogue, Oxford University Press, number 9780198283812, March.
  9. Arthur J. Rolnick & Warren E. Weber, 1986. "Gresham's law or Gresham's fallacy?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 17-24.
  10. Dumas, Bernard, 1992. "Dynamic Equilibrium and the Real Exchange Rate in a Spatially Separated World," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 153-80.
  11. Barro, Robert J, 1979. "Money and the Price Level under the Gold Standard," Economic Journal, Royal Economic Society, vol. 89(353), pages 13-33, March.
  12. Oppers, S.E., 1994. "Was the Worldwide Shift to Gold Inevitable? An Analysis of the End pf Bimetalism," Working Papers 351, Research Seminar in International Economics, University of Michigan.
  13. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  14. Salant, Stephen W & Henderson, Dale W, 1978. "Market Anticipations of Government Policies and the Price of Gold," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 627-48, August.
  15. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
  16. Friedman, Milton, 1990. "Bimetallism Revisited," Journal of Economic Perspectives, American Economic Association, vol. 4(4), pages 85-104, Fall.
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