Working Paper: NBER ID: w13918
Authors: Niall Ferguson; Moritz Schularick
Abstract: This paper asks whether developing countries can reap credibility gains from submitting policy to a strict monetary rule. Following earlier work, we look at the gold standard era (1880-1914) as a "natural experiment" to test whether adoption of a rule-based monetary framework such as the gold standard increased policy credibility. On the basis of the largest possible dataset covering almost sixty independent and colonial borrowers in the London market, we challenge the traditional view that gold standard adherence worked as a credible commitment mechanism that was rewarded by financial markets with lower borrowing costs. We demonstrate that in the poor periphery -- where policy credibility is a particularly acute problem -- the market looked behind "the thin film of gold". Our results point to a dichotomy: whereas country risk premia fell after gold adoption in developed countries, there were no credibility gains in the volatile economic and political environments of developing countries. History shows that monetary policy rules are no short-cut to credibility in situations where vulnerability to economic and political shocks, not time-inconsistency, are overarching concerns for investors.
Keywords: monetary policy; gold standard; policy credibility; developing countries; country risk
JEL Codes: F21; F33; F36; N10; N20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| economic and political instabilities (O17) | credibility gains from adherence to the gold standard (E42) |
| gold standard adherence (E42) | risk premia in developed countries (G19) |
| gold standard adherence (E42) | risk premia in developing countries (F65) |
| adherence to the gold standard (E42) | country risk premia (F34) |