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The effects of countercyclical interest rates: Evidence from the classical gold standard

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  • Mitchener, Kris James
  • Pina, Gonçalo

Abstract

We estimate the impact of countercyclical interest rates on macroeconomic outcomes in open economies. To identify countercyclical interest rates, we construct a new database of short-term interest rates, principal exports, and commodity prices for 40 economies from 1870–1913. Specialization and trade integration subjected economies to a “commodity lottery” in the form of price fluctuations in world markets. Capital mobility and a currency peg exposed them to interest-rate movements originating in the U.K., the largest economy and linchpin of the classical gold standard. We use these two exogenous shocks to identify positive effects of commodity-export prices on real GDP and the domestic price level and negative effects of exogenous changes in short-term interest rates on the same variables. We show that countercyclical interest rates, defined relative to export-price shocks, stabilized both output and the domestic price level. This stabilization was more effective for the price level than for output.

Suggested Citation

  • Mitchener, Kris James & Pina, Gonçalo, 2023. "The effects of countercyclical interest rates: Evidence from the classical gold standard," Journal of International Economics, Elsevier, vol. 145(C).
    • Handle: RePEc:eee:inecon:v:145:y:2023:i:c:s0022199623001137
    DOI: 10.1016/j.jinteco.2023.103827
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