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Credibility of the Interwar Gold Standard, Uncertainty, and the Great Depression

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  • J. Peter Ferderer

Abstract

This paper constructs a theoretical model to show how the credibility of a country’s commitment to an international gold standard regime is driven by fundamental determinants such as: 1) shifts in domestic policy, 2) a breakdown in cooperation between central banks, and 3) unilateral devaluations by foreign central banks. Because the credibility of the gold standard regime is an important determinant of domestic interest rate uncertainty, the latter is endogenously linked to changes in the fundamental determinants. Applying this analysis to the inter-war period, the paper shows that GARCH measures of interest rate uncertainty rose dramatically in the U.S. during the early 1930s and that movements in this series can be explained by events which affected the credibility of the U.S. commitment to the gold standard. Also, interest rate uncertainty explains a great deal of the variation in aggregate output and its components during the interwar period. Thus there is evidence that the breakdown in the gold standard contributed to the Great Depression by injecting increased uncertainty into the U.S. economy.

Suggested Citation

  • J. Peter Ferderer, 1994. "Credibility of the Interwar Gold Standard, Uncertainty, and the Great Depression," Economics Working Paper Archive wp_102, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_102
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    References listed on IDEAS

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    1. Evans, Martin & Wachtel, Paul, 1993. "Inflation Regimes and the," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 475-511, August.
    2. Stephen D. Williamson, 1987. "Costly Monitoring, Loan Contracts, and Equilibrium Credit Rationing," The Quarterly Journal of Economics, Oxford University Press, vol. 102(1), pages 135-145.
    3. Bera, Anil K & Higgins, Matthew L & Lee, Sangkyu, 1992. "Interaction between Autocorrelation and Conditional Heteroscedasticity: A Random-Coefficient Approach," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(2), pages 133-142, April.
    4. Nathan Balke & Robert J. Gordon, 1986. "Appendix B: Historical Data," NBER Chapters,in: The American Business Cycle: Continuity and Change, pages 781-850 National Bureau of Economic Research, Inc.
    5. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
    6. Peter K. Clark, 1979. "Investment in the 1970s: Theory, Performance, and Prediction," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, pages 73-124.
    7. Sumner, Scott, 1992. "The role of the international gold standard in commodity price deflation: Evidence from the 1929 stock market crash," Explorations in Economic History, Elsevier, vol. 29(3), pages 290-317, July.
    8. Flacco, Paul R & Parker, Randall E, 1992. "Income Uncertainty and the Onset of the Great Depression," Economic Inquiry, Western Economic Association International, vol. 30(1), pages 154-171, January.
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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