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Journal ArticleDOI

The inter–war gold exchange standard: Credibility and monetary independence

01 Feb 2003-Journal of International Money and Finance (Elsevier BV)-Vol. 22, Iss: 1, pp 1-32
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.
Citations
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TL;DR: The authors studied the day-to-day management of monetary policy in the Netherlands between 1925 and 1936 and found that policy leaders and central bankers were both willing and able to deviate from the monetary policy paths set by other countries, all while remaining firmly within the gold bloc.
Abstract: Our study of the day-to-day management of monetary policy in the Netherlands between 1925 and 1936 reveals that policy leaders and central bankers were both willing and able to deviate from the monetary policy paths set by other countries, all while remaining firmly within the gold bloc. The Netherlands wielded an independent monetary policy while remaining on gold thanks to its central bank's plentiful gold reserves. Central bankers quelled any speculation against the guilder by exploiting their domestic policy influence and international reputation to restrict capital mobility. However, maintaining pre-war parity until the collapse of the gold standard in September 1936 came at a cost. Our international comparisons and counterfactual analysis suggest that Dutch officials would have avoided a deepening of the Great Depression by leaving gold alongside the UK in 1931.
Journal ArticleDOI
TL;DR: In this paper, the authors studied Swedish stabilization policies through six policy regimes between 1873 and 2019, focusing on discretionary stabilization policies by estimating policy shocks, and explored how Swedish stabilisation policies have evolved over time through these shocks: how different institutional setups affected the policies and how policymakers responded to key economic events such as financial crises and wars.
Abstract: There is a never-ending quest for a stable economy with full employment and low inflation. Economists have suggested and policymakers have experimented with different fiscal and monetary policy regimes since at least the beginning of the industrial revolution. In this paper, we study Swedish stabilization policies through six policy regimes between 1873 and 2019. We focus on discretionary stabilization policies by estimating policy shocks. We then explore how Swedish stabilization policies have evolved over time through these shocks: how different institutional setups affected the policies and how policymakers responded to key economic events such as financial crises and wars.
Posted Content
01 Jan 2013
TL;DR: In this article, the authors analyzed the role of reserve currencies in the International Monetary System (IMS) and the role played by the euro as an international reserve currency, drawing on econometric estimations, they extrapolate the evolution of the shares in international reserves of the euro, the US dollar and the renminbi.
Abstract: This chapter analyses the architecture of the International Monetary System (IMS) and the role of reserve currencies in it. We begin by describing the evolution of the IMS from the Gold Standard to the Bretton Woods system and the European integration process that led to the creation of the euro. We then discuss the role played by the euro in the IMS as an international reserve currency. Drawing on econometric estimations, we extrapolate the evolution of the shares in international reserves of the euro, the US dollar and the renminbi. In the discussion, we take into account the current sovereign debt crisis and the possibility of a currency war taking place as a result of the reportedly excessive undervaluation of the renminbi and of the expansionist monetary policies undertaken in several advanced economies, namely in the USA. The text ends with a review of proposals for reducing the likelihood of currency wars, which may disrupt the functioning of the current IMS.
01 Jan 2016
TL;DR: In this article, the authors examined the general trend among the central banks' demand for gold during recent global financial crisis and whether India's purchase of gold was a reserve management strategy or otherwise and whether it affected the gold price trend.
Abstract: When India purchased 200 tonnes of gold under the International Monetary Fund's limited gold sales programme, it was interpreted inter alia that it may further inflate the gold price when the price was already ruling high. This motivated us to examine the general trend among the central banks’ demand for gold during recent global financial crisis. In that context, whether India’s purchase of gold was a reserve management strategy or otherwise and whether it affected the gold price trend is examined in this study. In the course of analysis, several related issues such as optimum size of gold in the foreign reserves and rationale of central banks buying gold with special reference to the global crisis are also addressed. The study found that central banks in most of the EMEs and advanced economies had either bought fresh stock of gold or stopped selling their existing stock of gold in the wake of the ‘recent global crisis’. This was strongly supported by economic rationale to hold sizable reserves of gold especially during ‘heightened uncertainty’. India’s purchase did not, apparently, has any impact on the gold price trend and to stock up gold is in line with the global trend.
References
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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

Journal ArticleDOI
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

Journal ArticleDOI
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