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Effective Exchange Rates and the Classical Gold Standard Adjustment

Luis Catão () and Solomos Solomou ()

American Economic Review, 2005, vol. 95, issue 4, 1259-1275

Abstract: Using a new international dataset of trade-weighed exchange rates, this paper highlights a neglected adjustment mechanism in the classical gold standard literature. Since gold-pegged countries traded extensively with economies operating more flexible monetary regimes and where parity change was a common adjustment device to systemic shocks, we show that such parity adjustments induced worldwide swings in nominal effective exchange rates. These translated into real exchange rate variations to which trade balances responded with an average elasticity of unity and in the direction of restoring external disequilibria. We conclude that some nominal exchange rate flexibility thus present in the pre-1914 system was instrumental to international payments adjustment.

Date: 2005
Note: DOI: 10.1257/0002828054825565
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