The "Thin Film Of Gold": Monetary Rules and Policy Credibility In Developing Countries

Niall Ferguson and Moritz Schularick

No 13918, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: F2 F33 F36 N10 N20 (search for similar items in EconPapers)
Date: 2008-04
New Economics Papers: this item is included in nep-cba, nep-his and nep-mon
Note: DAE ITI IFM ME
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Citations: View citations in EconPapers (8)

Published as European Review of Economic History (2012) 16 (4): 384-407. doi: 10.1093/ereh/hes006 First published online: October 19, 2012

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