Working Paper: NBER ID: w27067
Authors: Michael D. Bordo; Christopher M. Meissner
Abstract: Was foreign currency denominated debt a determinant of exchange rate and monetary policy during the Great Depression? Policy makers of the day thought so. High-frequency bond price data show depreciation was associated with elevated risk premia on public debt. We also show that foreign currency debt was a determinant of exchange rate policy during the Great Depression. The gold standard heightened exposure to global shocks and prolonged the Great Depression. Why then did countries hesitate to jettison the monetary technology? Multiple factors have been identified in the literature ranging from economic and political considerations to social preferences for monetary stability. We find that foreign currency debt and trade patterns, both shaped by history and geography, had a significant impact on these choices and hence on economic stability. The effect is likely to be about half as large as the output gap in determining exchange rate policy.
Keywords: No keywords provided
JEL Codes: F31; F34; N10; N2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| gold standard (E42) | exposure to global shocks (F69) |
| exposure to foreign currency debt (F31) | borrowing costs (H74) |
| foreign currency debt (F34) | monetary policy responses (E52) |
| foreign currency debt (F34) | timing of recovery from the Great Depression (N12) |
| gold standard (E42) | constrained exchange rate policies (F31) |
| foreign currency debt (F34) | risks associated with currency depreciation (F31) |
| foreign currency debt (F34) | exchange rate policy (F31) |
| currency depreciation (F31) | elevated risk premia on public debt (H63) |