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Did adhering to the gold standard reduce the cost of capital?

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  • Ron Alquist
  • Benjamin Chabot

Abstract

A commonly cited benefit of the pre-World War One gold standard is that it reduced the cost of international borrowing by signaling a country’s commitment to financial probity. Using a newly constructed data set that consists of more than 55,000 monthly sovereign bond returns, we test if gold-standard adherence was negatively correlated with the cost of capital. Conditional on UK risk factors, we find no evidence that the bonds issued by countries off gold earned systematically higher excess returns than the bonds issued by countries on gold. Our results are robust to allowing betas to differ across bonds issued by countries off- and on-gold; to including proxies that capture the effect of fiscal, monetary, and trade shocks on the commitment to gold; and to controlling for the effect of membership in the British Empire.

Suggested Citation

  • Ron Alquist & Benjamin Chabot, 2010. "Did adhering to the gold standard reduce the cost of capital?," Working Paper Series WP-2010-13, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-2010-13
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    File URL: http://www.chicagofed.org/digital_assets/publications/working_papers/2010/wp2010_13.pdf
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    References listed on IDEAS

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    1. Lazaretou, Sophia, 2005. "The drachma, foreign creditors, and the international monetary system: tales of a currency during the 19th and the early 20th centuries," Explorations in Economic History, Elsevier, vol. 42(2), pages 202-236, April.
    2. Lars Jonung, 1984. "Swedish Experience under the Classical Gold Standard, 1873-1914," NBER Chapters,in: A Retrospective on the Classical Gold Standard, 1821-1931, pages 361-404 National Bureau of Economic Research, Inc.
    3. Michael D. Bordo & Anna J. Schwartz, 1994. "The Specie Standard as a Contingent Rule: Some Evidence for Core and Peripheral Countries, 1880-1990," NBER Working Papers 4860, National Bureau of Economic Research, Inc.
    4. Gerardo della Paolera & Alan M. Taylor, 2001. "Straining at the Anchor: The Argentine Currency Board and the Search for Macroeconomic Stability, 1880-1935," NBER Books, National Bureau of Economic Research, Inc, number paol01-1.
    5. Pamuk,Sevket, 2004. "A Monetary History of the Ottoman Empire," Cambridge Books, Cambridge University Press, number 9780521617116, December.
    6. Michael D. Bordo & Anna J. Schwartz, 1984. "A Retrospective on the Classical Gold Standard, 1821-1931," NBER Books, National Bureau of Economic Research, Inc, number bord84-1.
    7. Meissner, Christopher M., 2005. "A new world order: explaining the international diffusion of the gold standard, 1870-1913," Journal of International Economics, Elsevier, pages 385-406.
    8. Michele Fratianni & Franco Spinelli, 1984. "Italy in the Gold Standard Period, 1861-1914," NBER Chapters,in: A Retrospective on the Classical Gold Standard, 1821-1931, pages 405-454 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Marc Flandreau & Kim Oosterlinck, 2011. "Was the Emergence of the International Gold Standard Expected?Melodramatic Evidence from Indian Government Securities," Working Papers CEB 11-001, ULB -- Universite Libre de Bruxelles.
    2. Marc Flandreau, Kim Oosterlinck, 2011. "Was the Emergence of the International Gold Standard Expected? Melodramatic Evidence from Indian Government Securities," IHEID Working Papers 01-2011, Economics Section, The Graduate Institute of International Studies.
    3. Flandreau, Marc & Oosterlinck, Kim, 2012. "Was the emergence of the international gold standard expected? Evidence from Indian Government securities," Journal of Monetary Economics, Elsevier, pages 649-669.

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    Keywords

    Gold standard ; Bonds;

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