Are Hard Pegs Ever Credible in Emerging Markets? Evidence from the Classical Gold Standard / Kris James Mitchener, Marc D. Weidenmier.

Format:

Book

Author/Creator:

Mitchener, Kris James.

Contributor:

National Bureau of Economic Research.

Weidenmier, Marc D.

Series:

Working Paper Series (National Bureau of Economic Research) no. w15401.

NBER working paper series no. w15401

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2009.

Summary:

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.

Notes:

Print version record

October 2009.