Working Paper: NBER ID: w10961
Authors: Ted Juhl; William Miles; Marc D. Weidenmier
Abstract: We introduce a new weekly database of spot and forward US-UK exchange rates as well as interest rates to examine the integration of forward exchange markets during the classical gold standard period (1880-1914). Using threshold autoregressions (TAR), we estimate the transactions cost band of covered interest differentials (CIDs) and compare our results to studies of more recent periods. Our findings indicate that CIDs for the US-UK rate were generally larger during the classical gold standard than any period since. We argue that slower information and communications technology during the gold standard period led to fewer short-term financial flows, higher transactions costs, and larger CIDs.
Keywords: covered interest arbitrage; financial market integration; classical gold standard
JEL Codes: F3; N2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Advancements in information and communication technology (L96) | Reduction in transaction costs (D23) |
| Advancements in information and communication technology (L96) | Enhanced flow of information (O36) |
| Reduction in transaction costs (D23) | More integrated financial market (G19) |
| Classical gold standard lacked financial infrastructure (N13) | Higher covered interest differentials (CIDs) (E43) |
| Higher covered interest differentials (CIDs) (E43) | Larger during the classical gold standard period (N13) |
| CIDs were larger during the classical gold standard period (N13) | Compared to any subsequent period (N13) |