Working Paper: NBER ID: w9345
Authors: Maurice Obstfeld; Alan M. Taylor
Abstract: What determines sovereign risk? We study the London bondmarket from the 1870s to the 1930s. Our findings support conventional wisdom concerning the low 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 favorably, and markets scrutinized other signals. Public debt and British Empire membership were important determinants of spreads after World War One, but not before.
Keywords: No keywords provided
JEL Codes: F2; 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 |
|---|---|
| Adherence to the gold standard (E42) | Reduced borrowing costs (G32) |
| Adherence to the gold standard (E42) | Lower country risk (F34) |
| Post World War One political dynamics (N44) | Changed relationship between country risk and gold standard adherence (F33) |
| Public debt (H63) | Influences effects of gold standard adherence on borrowing spreads (F65) |
| Political power dynamics (D72) | Influences effects of gold standard adherence on borrowing spreads (F65) |
| Devaluation prior to resumption (F31) | More favorable treatment by the market (G19) |
| Credibility of gold commitments (F33) | Changed after World War One (N44) |