EconPapers    
Economics at your fingertips  
 

Credible Commitment and Exchange Rate Stability: Canada's Interwar Experience

Michael Bordo and Angela Redish

No 2431, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In January 1929 the Canadian government suspended gold exports and began a floating exchange rate regime that endured until the onset of World War 11. In sharp contrast with the experience of other countries which left the gold standard, deflation and declining economic activity continued in Canada until 1933. This paper examines the determinants of the Canadian exchange rate in the 1930's and provides an answer to the question of why the Canadian dollar did not depreciate in the early 1930's despite Canada's de facto departure from the Gold Standard. We develop the answer in two stages. First, we show that the government made a clear commitment to maintain a contractionary monetary policy. It did so because it believed: that monetary expansion would increase the value of external obligations without reducing the value of domestic obligations; and that even if all contractual obligations were met, Canada would lose her reputation as a responsible debtor. Second, we argue that the government's commitment was viewed by the public as credible. The credible commitment dominated market agent's expectations of the evolution of the exchange rate.

Date: 1987-11
Note: ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published as Canadian Journal of Economics, Vol. 23, No. 2, pp. 357-380, (May 1990).

Downloads: (external link)
http://www.nber.org/papers/w2431.pdf (application/pdf)

Related works:
Journal Article: Credible Commitment and Exchange Rate Stability: Canada's Interwar Experience (1990) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:2431

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w2431

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2025-03-19
Handle: RePEc:nbr:nberwo:2431