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Are Hard Pegs Ever Credible in Emerging Markets? Evidence from the Classical Gold Standard

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  • Kris James Mitchener
  • Marc D. Weidenmier

Abstract

We test whether fixed exchange rate regimes are ever credible in emerging markets by analyzing the behavior of short-term domestic trade bills across countries during the classical gold standard period, the most widely used hard peg in modern financial history. We exploit the fact that global capital markets were unfettered in order to identify the currency-risk component using uncovered interest parity for 17 of the largest emerging market borrowers for the period 1870-1913. We show that five years after a country joined the gold standard, the currency risk premium averaged at least 285 basis points for emerging market economies. We estimate that investors expected exchange rates to fall by roughly 28 percent even after emerging market borrowers joined the gold standard. Positive currency risk premiums that persisted long after gold standard adoption suggests that hard pegs for emerging market borrowers may never be fully credible.

Suggested Citation

  • Kris James Mitchener & Marc D. Weidenmier, 2009. "Are Hard Pegs Ever Credible in Emerging Markets? Evidence from the Classical Gold Standard," NBER Working Papers 15401, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:15401
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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 0005, European Historical Economics Society (EHES).
    2. Daniela Bragoli & Camilla Ferretti & Piero Ganugi & Giancarlo Ianulardo, 2013. "Monetary regimes and statistical regularity: the Classical Gold Standard (1880-1913) through the lenses of Markov models," Discussion Papers 1301, Exeter University, Department of Economics.
    3. Volosovych, Vadym, 2011. "Measuring financial market integration over the long run: Is there a U-shape?," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1535-1561.
    4. Kim Oosterlinck, 2013. "Sovereign debt defaults: insights from history," Oxford Review of Economic Policy, Oxford University Press, vol. 29(4), pages 697-714, WINTER.
    5. William Miles, 2015. "Did the Classical Gold Standard Lead to Greater Price Level Convergence? A New Approach," Open Economies Review, Springer, vol. 26(2), pages 351-377, April.
    6. Alquist, Ron & Chabot, Benjamin, 2011. "Did gold-standard adherence reduce sovereign capital costs?," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 262-272.

    More about this item

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • N10 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - General, International, or Comparative
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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