DP3688 Sovereign Risk, Credibility and the Gold Standard: 1870-1913 versus 1925-31

Author(s): Maurice Obstfeld, Alan M. Taylor
Publication Date: January 2003
Keyword(s): credibility, exchange rates, gold standard, monetary regimes, sovereign risk
JEL(s): F20, F33, F36, F41, N10, N20
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3688

What determines sovereign risk? We study the London bond market from the 1870s to the 1930s. Our findings support conventional wisdom concerning the limited credibility of the interwar gold standard. Before 1914, gold standard adherence effectively signalled credibility and shaved 40 to 60 basis points from country borrowing spreads. In the 1920s, however, simply resuming prewar gold parities was insufficient to secure such benefits. Countries that devalued before resumption were treated favourably, and markets scrutinized other signals. Public debt and British Empire membership were important determinants of spreads after World War One, but not before.