Credible Commitment and Exchange Rate Stability: Canada's Interwar Experience / Michael D. Bordo, Angela Redish.

Format:

Book

Author/Creator:

Bordo, Michael D.

Contributor:

National Bureau of Economic Research.

Redish, Angela.

Series:

Working Paper Series (National Bureau of Economic Research) no. w2431.

NBER working paper series no. w2431

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Credible Commitment and Exchange Rate Stability

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1987.

Summary:

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.

Notes:

Print version record

November 1987.