Causal Effects of Countercyclical Interest Rates: Evidence from the Classical Gold Standard

Kris James Mitchener and Goncalo Pina

No 9716, CESifo Working Paper Series from CESifo

Abstract: We estimate the causal impact of countercyclical interest rates on macroeconomic outcomes in open economies. To identify countercyclical interest rates, we construct a new database of short-term interest rates, principal exports, and international commodity prices for 40 economies from 1870 to 1913. This era of capital mobility, nominal anchors, specialization and trade integration, exposed economies to multiple exogenous demand-side shocks. Specialization and trade integration subjected economies to a “commodity lottery” in the form of price fluctuations in world markets. Capital mobility and a currency peg exposed them to interest-rate movements originating in the U.K., the largest economy and linchpin of the classical gold standard. We identify (i) positive effects of commodity-export prices on real GDP and the domestic price level and (ii) negative effects of exogenous changes in short-term interest rates on the same variables. We then show that countercyclical interest rates, defined relative to export-price shocks, stabilized both output and the domestic price level. This stabilization was more effective for the price level than for output.

Keywords: countercyclical interest rates; stabilization; gold standard; commodity lottery (search for similar items in EconPapers)
JEL-codes: E32 E52 F33 F41 F62 N10 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-his, nep-mac, nep-mon and nep-opm
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Related works:
Working Paper: Causal Effects of Countercyclical Interest Rates: Evidence from the Classical Gold Standard (2022)
Working Paper: Causal Effects of Countercyclical Interest Rates: Evidence from the Classical Gold Standard (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_9716

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