The inter–war gold exchange standard: Credibility and monetary independence
TL;DR: In this paper, the authors analyzed the operation of the interwar gold exchange standard to see if the evident credibility of the system conferred on participating central banks the ability to pursue independent monetary policies.
About: This article is published in Journal of International Money and Finance.The article was published on 2003-02-01 and is currently open access. It has received 29 citations till now. The article focuses on the topics: Interest rate parity & Covered interest arbitrage.
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TL;DR: A natural experiment with an exchange-rate band in Austria-Hungary in the early 20th century provides a rare opportunity to discuss critical aspects of the theory of target zones as mentioned in this paper.
Abstract: A natural experiment with an exchange-rate band in Austria-Hungary in the early 20th century provides a rare opportunity to discuss critical aspects of the theory of target zones Providing a new derivation of the target zone model as a set of nested hypotheses, the inference is drawn that policy credibility and market efficiency were paramount in the success of the Austro-Hungarian experience
27 citations
Cites result from "The inter–war gold exchange standar..."
...Results are report in the first part (Section 1) of Table 3. Perhaps unsurprisingly, they are similar to those reported in related work ( Bordo and MacDonald, 2003, 2005; Hallwood et al., 1997, 2000)....
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...Knell and Stix (2004) report values around 0.1 for annual interest rates expressed 14 they are similar to those reported in related work (Bordo and MacDonald 2003; 2005, Hallwood, MacDonald and Marsh 1997; 2000)....
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TL;DR: In this article, a new derivation of the target zone model as a set of nested hypotheses is presented, and the inference is drawn that policy credibility and market efficiency were paramount in the success of the Austro-Hungarian experience.
20 citations
TL;DR: In this paper, a re-conceptualization of the gold standard system has brought to the fore its reputational aspects and its status as a "contingent rule" instead of the traditional approach, which focused on adherence to strict patterns of behaviour and well-defined rules.
Abstract: The gold standard is not the monolithic metallic monetary system that it was once believed to be. Country cases and detailed studies of the actual workings of the system have shown that the gold standard was not a rigid mechanism for adjustment to external disequilibria, and that it enabled core and peripheral nations to tailor it to their needs. Exchange rate stability was achieved by various means. Some countries followed the so-called ‘rules of the game’, while others systematically evaded the rules and resorted to a variety of methods to keep the price of their currencies fixed against gold. Moreover, gold coins were a major part of the money in circulation in some countries, while gold did not circulate at all in others. Gold convertibility was usual in the core countries but, to a certain extent, specie convertibility was the exception in peripheral nations. As has recently been stressed, a re-conceptualization of the gold standard system has brought to the fore its reputational aspects and its status as a ‘contingent rule’, instead of the traditional approach, which focused on adherence to strict patterns of behaviour and well-defined rules. According to the new approach, the monetary policies that were followed in the short term mattered little, provided that in the long term a country was fully committed to the regime and that the financial community believed this to be true.1
18 citations
Dissertation•
14 Dec 2016
TL;DR: This paper studied monetary thought and works between 1919 and 1960, focusing on the non-automatic and asymmetric nature of the balance of payments adjustment mechanism, and formulated an original critic towards the classical Ricardian gold standard theory.
Abstract: My PhD dissertation studies Ralph G. Hawtrey’s, Harry D. White’s and Robert Triffin’s monetary thought and works between 1919 and 1960. Actively participating to key institutions which shaped the international monetary system – the British Treasury for Hawtrey, the US Treasury for White and the Fed and the IMF in the case of Triffin – those economists influenced the course of monetary theory and history. They both wrote on the non-automatic and asymmetric nature of the balance of payments adjustment mechanism, and formulated an original critic towards the classical Ricardian gold standard theory. Structured around the rejection of this classical theory, the authors’ analysis pointed out the weaknesses of the international monetary system. Since then, all of their reform proposals were grounded on the strengthening of monetary cooperation under a fixed exchange rates system.
18 citations
TL;DR: The authors analyzes the historical evolution of the international monetary system in the context of the rising role of developing countries in the world economy and the emerging multi-polar growth setting and concludes that more ambitious reforms of the system may be needed to meaningfully reduce future global economic and financial instability.
Abstract: This paper analyzes the historical evolution of the international monetary system in the context of the rising role of developing countries in the world economy and the emerging multi-polar growth setting. It evaluates the stability of the current"non-system"and how the global economic context is likely to affect that stability in the coming years with potential adverse effects on both advanced and developing economies. Given the likely trend toward a multi-polar reserve currency system, the paper evaluates the stability of the emerging system, as well as the current proposals for reform of the international monetary system. The paper concludes that more ambitious reforms of the system may be needed to meaningfully reduce future global economic and financial instability.
14 citations
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TL;DR: The relationship between co-integration and error correction models, first suggested in Granger (1981), is here extended and used to develop estimation procedures, tests, and empirical examples.
Abstract: The relationship between co-integration and error correction models, first suggested in Granger (1981), is here extended and used to develop estimation procedures, tests, and empirical examples. If each element of a vector of time series x first achieves stationarity after differencing, but a linear combination a'x is already stationary, the time series x are said to be co-integrated with co-integrating vector a. There may be several such co-integrating vectors so that a becomes a matrix. Interpreting a'x,= 0 as a long run equilibrium, co-integration implies that deviations from equilibrium are stationary, with finite variance, even though the series themselves are nonstationary and have infinite variance. The paper presents a representation theorem based on Granger (1983), which connects the moving average, autoregressive, and error correction representations for co-integrated systems. A vector autoregression in differenced variables is incompatible with these representations. Estimation of these models is discussed and a simple but asymptotically efficient two-step estimator is proposed. Testing for co-integration combines the problems of unit root tests and tests with parameters unidentified under the null. Seven statistics are formulated and analyzed. The critical values of these statistics are calculated based on a Monte Carlo simulation. Using these critical values, the power properties of the tests are examined and one test procedure is recommended for application. In a series of examples it is found that consumption and income are co-integrated, wages and prices are not, short and long interest rates are, and nominal GNP is co-integrated with M2, but not M1, M3, or aggregate liquid assets.
27,170 citations
19 Oct 2012
TL;DR: In this paper, the authors present the likelihood methods for the analysis of cointegration in VAR models with Gaussian errors, seasonal dummies, and constant terms, and show that the asymptotic distribution of the maximum likelihood estimator is mixed Gausssian.
Abstract: Presents the likelihood methods for the analysis of cointegration in VAR models with Gaussian errors, seasonal dummies, and constant terms. Discusses likelihood ratio tests of cointegration rank and find the asymptotic distribution of the test statistics. Shows that the asymptotic distribution of the maximum likelihood estimator is mixed Gausssian.
9,355 citations
TL;DR: In this article, the authors derived the likelihood analysis of vector autoregressive models allowing for cointegration and showed that the asymptotic distribution of the maximum likelihood estimator of the cointegrating relations can be found by reduced rank regression and derives the likelihood ratio test of structural hypotheses about these relations.
Abstract: This paper contains the likelihood analysis of vector autoregressive models allowing for cointegration. The author derives the likelihood ratio test for cointegrating rank and finds it asymptotic distribution. He shows that the maximum likelihood estimator of the cointegrating relations can be found by reduced rank regression and derives the likelihood ratio test of structural hypotheses about these relations. The author shows that the asymptotic distribution of the maximum likelihood estimator is mixed Gaussian, allowing inference for hypotheses on the cointegrating relation to be conducted using the Chi(" squared") distribution. Copyright 1991 by The Econometric Society.
9,112 citations
Posted Content•
TL;DR: A number of recent studies have weighed in with fairly persuasive evidence that real exchange rates (nominal exchange rates adjusted for differences in national price levels) tend toward purchasing power parity in the very long run as discussed by the authors.
Abstract: FIRST ARTICULATED by scholars of the ISalamanca school in sixteenth century Spain,1 purchasing power parity (PPP) is the disarmingly simple empirical proposition that, once converted to a common currency, national price levels should be equal. The basic idea is that if goods market arbitrage enforces broad parity in prices across a sufficient range of individual goods (the law of one price), then there should also be a high correlation in aggregate price levels. While few empirically literate economists take PPP seriously as a short-term proposition, most instinctively believe in some variant of purchasing power parity as an anchor for long-run real exchange rates. Warm, fuzzy feelings about PPP are not, of course, a substitute for hard evidence. There is today an enormous and evergrowing empirical literature on PPP, one that has arrived at a surprising degree of consensus on a couple of basic facts. First, at long last, a number of recent studies have weighed in with fairly persuasive evidence that real exchange rates (nominal exchange rates adjusted for differences in national price levels) tend toward purchasing power parity in the very long run. Consensus estimates suggest, however, that the speed of convergence to PPP is extremely slow; deviations appear to damp out at a rate of roughly 15 percent per year. Second, short-run deviations from PPP are large and volatile. Indeed, the one-month conditional volatility of real exchange rates (the volatility of deviations from PPP) is of the same order of magnitude as the conditional volatility of nominal exchange rates. Price differential volatility is surprisingly large even when one confines attention to relatively homogenous classes of highly traded goods. The purchasing power parity puzzle then is this: How can one reconcile the enormous short-term volatility of real exchange rates with the extremely slow rate at which shocks appear to damp out? Most explanations of short-term exchange rate volatility point to financial factors such as changes in portfolio preferences, short-term asset price bubbles, and monetary shocks (see, for example, Maurice Obstfeld and Rogoff forthcoming). Such shocks can have substantial effects on the real economy in the presence of sticky nominal wages and prices. I See Lawrence H. Officer (1982, ch. 3) for an extensive discussion of the origins of PPP theory; see also Dornbusch (1987).
2,901 citations
TL;DR: The idea underlying cointegration allows specification of models that capture part of such beliefs, at least for a particular type of variable that is frequently found to occur in macroeconomics.
Abstract: At the least sophisticated level of economic theory lies the belief that certain pairs of economic variables should not diverge from each other by too great an extent, at least in the long-run. Thus, such variables may drift apart in the short-run or according to seasonal factors, but if they continue to be too far apart in the long-run, then economic forces, such as a market mechanism or government intervention, will begin to bring them together again. Examples of such variables are interest rates on assets of different maturities, prices of a commodity in different parts ofthe country, income and expenditure by local government and the value of sales and production costs of an industry. Other possible examples would be prices and wages, imports and exports, market prices of substitute commodities, money supply and prices and spot and future prices of a commodity. In some cases an economic theory involving equilibrium concepts might suggest close relations in the long-run, possibly with the addition of yet further variables. However, in each case the correctness of the beliefs about long-term relatedness is an empirical question. The idea underlying cointegration allows specification of models that capture part of such beliefs, at least for a particular type of variable that is frequently found to occur in macroeconomics. Since a concept such as the long-run is a dynamic one, the natural area for these ideas is that of time-series theory and analysis. It is thus necessary to start by introducing some relevant time series models. Consider a single series Xf, measured at equal intervals of time. Time series theory starts by considering the generating mechanism for the series. This mechanism should be able to generate att of the statistical properties of the series, or at very least the conditional mean, variance and temporal autocorrelations, that is the 'linear properties' of the series, conditional on past data. Some series appear to be 'stationary', which essentially implies that the linear properties exist and are timeinvariant. Here we are concerned with the weaker but more technical
2,457 citations