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Inicio Investigaciones de Historia Económica - Economic History Research Michael D. Bordo and Ronald MacDonald (Eds.). Credibility and the International ...
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Vol. 12. Núm. 2.
The business of fashion in the nineteenth and twentieth centuries
Páginas 124-125 (Junio 2016)
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Vol. 12. Núm. 2.
The business of fashion in the nineteenth and twentieth centuries
Páginas 124-125 (Junio 2016)
Book Review
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Michael D. Bordo and Ronald MacDonald (Eds.). Credibility and the International Monetary Regime: A Historical Perspective. New York, Cambridge University Press, 2012, 240 págs., ISBN: 978-0-521-81133-0.
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Vincent Bignon
Banque de France, París, France
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The editors have succeeded in putting together a collection of state-of-the-art studies dealing with exchange rate regimes; thus, the book addresses a compelling set of questions and provides a reference point for comparative studies. On top of its important contributions, outlined further below, it also proposes new avenues for future research.

The important innovation encapsulated in the volume consists in expanding on the target zone theory developed by Krugman and others in the late 1980s. This theory explains the sustainability of fixed exchange rate regimes not only by economic fundamentals or interest rate differentials but also by traders’ beliefs regarding the (long-run) sustainability of bilateral exchange rate pegged to a fixed value in gold. The theory offers the great advantage of being testable in a straight-forward fashion: a variety of stationarity tests and regression analysis can be used to determine whether exchange rates had a tendency to revert back to their parity. All articles are, thus, cliometrics studies given that recent statistical methods are used to inform on a reduced set of stylized and selective historical facts.

The authors follow a traditional strain in monetary history that considers that establishing free convertibility of banknotes into a fixed quantity of gold in each country defines at the global level a system of fixed exchange rates that is prone to speculative attacks and, hence, to currency crises. The range of countries and time periods covered is perhaps therefore large. While the studies focus often on the US, the UK or France, certain chapters also study the credibility of the exchange rate regimes in Belgium, the Netherlands and Switzerland in the 1930s (the gold block episode) and in the countries of the European Monetary System of the late 1970s and early 1990s.

Overall, the book includes 10 chapters. The first chapter functions as a short introduction that sketches out the historical framework and that presents the main ingredients of the econometric models used in the various studies.

The next three chapters focus on the working of the classical gold standard established during the 1873–1913 period. In particular, chapter two shows the high degree of credibility of the international gold standard. Chapter three puts forward that credible currencies, such as the French Franc, enjoyed some degree of monetary independence in the sense that the central bank's interest rate could deviate from the Bank of England's interest rate despite the absence of barriers to capital flows and a peg to gold. The authors attribute the possibility that the impossible trinity did not hold to the credibility of the peg, which discouraged arbitrage. Chapter four is a careful study of the behavior of the US exchange rate showing that the dollar suffered in the 1890s from a peso problem. This implied a constant threat on the dollar's convertibility that was caused by the political agitation in favor of the monetization of silver, which, given the fall of the silver world price, would have signaled a switch to a more inflationary policy.

The next three chapters deal with the Interwar Gold Exchange standard. Chapter five studies the credibility of the fixed exchange rate of the 1920s, and mimics the results on monetary independence of chapter three but for the Interwar period. Chapter 6 shows that markets did not expect any exchange rate realignment up until mid-1931. This finding is interpreted as consistent with the notion that the demise of the gold standard in the 1930s was a speculative attack on otherwise credible currencies. The notion that these currency crises resulted from psychological factors is somewhat at odds with the historiography that rather attributes the devaluations to the transmission of solvency shocks affecting the Austrian and German banking systems. Chapter seven studies the causes of the dislocation of the Gold bloc in 1936. The study underlines that beyond the deflationary pressure created by the devaluation of other key currencies, the devaluation of the French franc was likely caused by geopolitical factors such as the re-militarization of Germany.

Finally, the last three chapters study episodes of post-World War II exchange rate regimes. Chapter eight focuses on specific episodes of the Bretton Wood system and studies the various currencies crisis of the British pound between 1964 and 1967. The last two chapters dealt with the credibility of the exchange rate mechanism of the European Monetary Systems of the 1970s and 1980s. The articles show that none of the currencies in the system were credible, i.e. exchange rates did not exhibit a tendency to return to their parity with the Deutsche Mark.

Throughout these chapters, the book makes three contributions to the literature on the sustainability of fixed exchange rate regime. First, it shows the relevance of the target zone framework in explaining the sustainability of a great variety of fixed exchange rate regimes. By applying systematically the same method on various regimes, the authors suggest that the gold exchange standard did not function as the golden fetters that impeded policy autonomy. This is a welcomed contribution to the policy debate.

Second, the book exemplifies how political events and beliefs have a first-order impact on the credibility of a peg to par. It provides evidence that the institutional arrangement of each regime does not immunize against political turmoil, as shown by the silverites movement in the US during the Classical Gold Standard or by effects of news of incoming war in countries still on the gold exchange standard in Europe in the 1930s. However, the authors use history in a way that may puzzle informed readers. While certain variables were included in the metrics (of what?) for historical reasons, the metrics rarely informs (allows challenging) the conventional historical narratives. The reading (my understanding?) does not preclude that the authors believe that a currency anchored on gold had a stabilizing role on credibility expectations per se. Yet, attributing special stabilizing power to the peg to gold hardly provides satisfactory foundations for comparative studies of monetary regimes.

Third, the results of the various studies suggest that since 1873 fixed exchange rate regimes became less and less credible. Indeed, the authors advocate that the classical gold standard was much more credible that the interwar gold standard, that was itself much more credible than the Bretton Woods system or the European Monetary System. Although the authors did not further explore this finding, it may provide a clue for why the European countries in the 1990s decided to create a single currency rather than attempting to design a new fixed exchange rate regime. Moreover, if one assumes that credibility is a desirable feature of a monetary regime, this result suggests that despite all the gains accruing to credible currencies, decisions makers increasingly failed to choose the most “efficient” monetary regime. If confirmed, this calls for a careful comparative historical study explaining why decision makers of pre World War I Europe succeeded in achieving what their followers of the Bretton Woods period, who supposedly benefited from more rigorous economics, failed to achieve. A contradiction for any cliometrician! The authors did not address this issue, nor did they make connection with the political science literature explaining why second best monetary regimes may have been chosen in the first place.

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