Are Hard Pegs Ever Credible in Emerging Markets? Evidence from the Classical Gold Standard

Kris James Mitchener and Marc Weidenmier ()

No 15401, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We test whether fixed exchange rate regimes are ever credible in emerging markets by analyzing the behavior of short-term domestic trade bills across countries during the classical gold standard period, the most widely used hard peg in modern financial history. We exploit the fact that global capital markets were unfettered in order to identify the currency-risk component using uncovered interest parity for 17 of the largest emerging market borrowers for the period 1870-1913. We show that five years after a country joined the gold standard, the currency risk premium averaged at least 285 basis points for emerging market economies. We estimate that investors expected exchange rates to fall by roughly 28 percent even after emerging market borrowers joined the gold standard. Positive currency risk premiums that persisted long after gold standard adoption suggests that hard pegs for emerging market borrowers may never be fully credible.

JEL-codes: F2 F33 F36 F41 N10 N20 (search for similar items in EconPapers)
Date: 2009-10
New Economics Papers: this item is included in nep-cba, nep-his and nep-mon
Note: DAE IFM
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Citations: View citations in EconPapers (11)

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