Sovereign Risk In The Classical Gold Standard Era

This paper explores the determinants of sovereign bond yields during the classical gold standard period (1872-1913). Using the Pooled Mean Group methodology, we find that the main benefit of the gold standard was as a short-hand device that enhanced a country’s reputation in international capital markets. By conveying important information to investors and enhancing the speed of adjustment of sovereign bond spreads to long-run equilibrium levels, the gold standard allowed country risk to be priced more effectively. In contrast to other studies, our results suggest that fundamental factors were more important in determining a country’s creditworthiness in the long-run than the exchange rate regime per se.