Working Paper: CEPR ID: DP3688
Authors: Maurice Obstfeld; Alan M. Taylor
Abstract: What determines sovereign risk? We study the London bond market from the 1870s to the 1930s. Our findings support conventional wisdom concerning the limited credibility of the interwar gold standard. Before 1914, gold standard adherence effectively signalled credibility and shaved 40 to 60 basis points from country borrowing spreads. In the 1920s, however, simply resuming prewar gold parities was insufficient to secure such benefits. Countries that devalued before resumption were treated favourably, and markets scrutinized other signals. Public debt and British Empire membership were important determinants of spreads after World War One, but not before.
Keywords: credibility; exchange rates; gold standard; monetary regimes; sovereign risk
JEL Codes: F20; F33; F36; F41; N10; N20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| gold standard adherence (E42) | borrowing costs (H74) |
| gold standard adherence (E42) | sovereign risk (F34) |
| public debt (H63) | borrowing costs (H74) |
| inflation rates (E31) | borrowing costs (H74) |
| gold standard adherence (E42) | borrowing spreads (F65) |
| returning to gold at prewar parities (F31) | borrowing spreads (F65) |