DP11640 Pegxit Pressure: Evidence from the Classical Gold Standard

Author(s): Kris James Mitchener, Goncalo Pina
Publication Date: November 2016
Keyword(s): commodity prices, currency risk, exchange-rate devaluation
JEL(s): F31, F33, F36, F41, N10, N20
Programme Areas: Economic History, International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11640

We develop a simple model that highlights the costs and benefits of fixed exchange rates as they relate to trade, and show that negative export-price shocks reduce fiscal revenue and increase the likelihood of an expected currency devaluation. Using a new high-frequency data set on commodity-price movements from the classical gold standard era, we then show that the model's main prediction holds even for the canonical example of hard pegs. We identify a negative causal relationship between export-price shocks and currency-risk premia in emerging market economies, indicating that negative export-price shocks increased the probability that countries abandoned their pegs.