Proposal preview

EXCHANGE RATES, GROWTH AND CONVERGENCE IN HISTORICAL PERSPECTIVE

It is well known that the exchange rate of the currency is crucial for a country’s competitiveness in international markets. Both a realistic value and stability of the exchange rate are likely to advance a country’s role in international trade and promote economic growth. Nevertheless, empirical assessments in monetary economics have usually tested this premise on the basis of short-term data. There are few studies that have taken a long-term perspective on this proposition. Consequently, it is broadly overlooked how exchange rates have influenced economic growth and convergence of income among nations in a longer perspective.
Yet, it is a common view that Japan and also parts of Western Europe did benefit from having undervalued currencies during their phases of catch-up in the 1950s and 1960s. And in recent years it has often been commented that China has long undervalued its currency in order to stimulate exports, discourage imports and build a vast strategic foreign exchange reserve. Can those cases be corroborated, are they exceptional cases, or is it possible that the exchange rate policies in certain countries in the past have equally contributed to their economic growth?
Comprehensive studies that cover a representative sample of countries across the world, and that establish when, how and where the exchange rate has mattered to paths of economic growth are still lacking. Nevertheless, it can be presumed that from the moment when countries started to use more active monetary policies in the late nineteenth century, the exchange rate arrangements became of greater importance, both for countries that had already embarked on industrialization and with sophisticated financial institutions, and for countries at lower levels of development.
Furthermore, analyses of exchange rate arrangements and growth raise other historical and methodological questions that are relevant to assessing historical paths of economic growth and convergence. For example, volatility in exchange rates and regime shifts give rise to issues such as sudden stops, while commitment to a fixed and credible exchange rate generates restrictions either to capital flows or to a fully-functioning, growth-promoting monetary policy. This makes the effect of choosing an exchange rate regime non-trivial beyond its effects on the current account.
And a fundamental methodological question concerns how to compare economic performance across time and space. It is customary in economic history to follow Angus Maddison’s lead and gauge long-term economic growth across countries on the basis of purchasing power parity (PPP) adjusted “1990 international dollars”. Still, asymmetric changes of relative prices in different countries imply that a 1990 PPP benchmark will not be representative across time. At bottom of this problem lies the issue whether the classical PPP theorem holds in the long term and consequently whether exchange rates in the long term better should approximate relative price levels than a distant PPP benchmark.
These related issues motivate a session at the WEHC. Papers presented in the session will deal with exchange rate developments and the concomitant institutional arrangement in different regions of the world over the past centuries, with the behaviour of exchange rates during periods of crisis and their link to financial stability, with political and theoretical considerations for the implementation of exchange rate arrangements, as well as with long-term measurement issues related to exchange rates and PPPs.
Draft papers for this session have been presented at a pre-conference at Lund University (Sweden), 24-25 April 2017. Yet, for the Boston session, proposals for papers are welcome until 20 December! The proposal should be a draft outline or summary of the paper of about 1500 words.
Send to Jonas.ljungberg@ekh.lu.se; Include “Boston” in the headline of the email!
The session organizers will make a selection of papers and inform whether accepted or rejected about 10 January 2018.

Organizer(s)

  • Jonas Ljungberg Lund University jonas.ljungberg@ekh.lu.se Sweden
  • Olga Christodoulaki vacant chr_olga@otenet.gr Greece
  • Germán Forero-Laverde Universidad de Barcelona/Universidad Externado de Colombia german.forero@gmail.com Spain
  • André Villela Graduate School of Economics/Fundação Getulio Vargas, Rio de Janeiro andre.villela@fgv.br Brazil
  • Pierre van der Eng Australian National University,Canberra/ Tsinghua University, Beijing pierre.vandereng@anu.edu.au Australia

Session members

  • Michael D Bordo, Rutgers University
  • Julien Brault, Science-Po, Paris
  • Liam Brunt, Norwegian School of Economics
  • Antonio Fidalgo, Fresen ius University of Applied Sciences
  • Atsushi Kobayashi, Osaka Sangyo University
  • Eric Monnet, Banque de France
  • Matthias Morys, University of York
  • Alain Naef, Cambridge University
  • Anders Ögren, Lund University
  • Alba Roldán Marin, University of Barcelona

Discussant(s)

  • James Foreman-Peck Cardiff University foreman-peckj@cardif.ac.uk
  • Marcela Sabaté University of Zaragoza msabate@unizar.es
  • and the organizers

Papers

Panel abstract

A point of departure for this session is the presumption that exchange rates have had, and still have, a significant impact on economic growth and convergence of nations. The papers of the session approach different aspects: balance of payments and bullion flows in intra-Asian trade in the mid-nineteenth century; the room for economic policy outside the classical gold standard in a case study of Spain; the impact of exchange rate institutions on boom and bust in Western Europe 1922-2015; the losers and winners of French foreign exchange control in the 20th century; success and failure of the Gold Pool in the 1960s; the Greek debt crisis and a century of foreign financial supervision in the Balkans; anachronism in the interpretation of the classical gold standard and the creation of EMU; real exchange rates and growth of Indonesia since 1870; historical PPP benchmarks to overcome the failure of PPP theory.

1st half

Growing Exchange Market and Bullion Trade in Asia, c.1830-70

Atsushi Kobayashi

The paper examines the mechanism of trade settlement and bullion arbitrage between the West and Asia and within Asia during the mid-nineteenth century. For the empirical analysis, this study employs the bullion points-method and using new statistical sources. First, through the reconstruction of bullion points between Indian and Chinese cities during the 1830s-60s, the paper shows that gold and bill of exchange were significant tools for international payments, rather than the silver efflux from China that has been a focus of studies. Second, regarding Asia’s silver absorption in the aftermath of the Gold Rush, the analysis of the bullion points between London and Asian cities over 1830s-60s reveals that the bullion prices and exchange rates wildly fluctuated in Asian markets in response to the increasing gold production after 1849, and it led to the emergence of arbitrage profit for silver shipments from Europe to Asia.

The paper examines the mechanism of trade settlement and bullion arbitrage between the West and Asia and within Asia during the mid-nineteenth century. For the empirical analysis, this study employs the bullion points-method and using new statistical sources. First, through the reconstruction of bullion points between Indian and Chinese cities during the 1830s-60s, the paper shows that gold and bill of exchange were significant tools for international payments, rather than the silver efflux from China that has been a focus of studies. Second, regarding Asia’s silver absorption in the aftermath of the Gold Rush, the analysis of the bullion points between London and Asian cities over 1830s-60s reveals that the bullion prices and exchange rates wildly fluctuated in Asian markets in response to the increasing gold production after 1849, and it led to the emergence of arbitrage profit for silver shipments from Europe to Asia.

Spain and the Classical Gold Standard. A Short- and Long-term Approach

Alba Roldan

This paper is an attempt to understand the effects of macroeconomic policies on Spanish economy distinguishing between short and long run during the classical gold standard. I present the empirical results based on the ARDL framework. An ARDL analysis reveals that adjustments in exchange rates and monetary and fiscal policy pursued as policy tools had a positive impact on Spanish economic growth. In the face of dramatic economic shocks, the rigidities of the monetary system inhibited recovery, particularly in countries on the periphery. None of these policy options would have been available under the gold standard and the impact of fluctuations in the economic cycle would have been much greater. My analysis sheds new light on the conduct of macroeconomic policy in Spain during the classical gold standard. The level of the exchange rate was key since it helped to improve the terms of trade, promoted exports and raised prices...

This paper is an attempt to understand the effects of macroeconomic policies on Spanish economy distinguishing between short and long run during the classical gold standard. I present the empirical results based on the ARDL framework. An ARDL analysis reveals that adjustments in exchange rates and monetary and fiscal policy pursued as policy tools had a positive impact on Spanish economic growth. In the face of dramatic economic shocks, the rigidities of the monetary system inhibited recovery, particularly in countries on the periphery. None of these policy options would have been available under the gold standard and the impact of fluctuations in the economic cycle would have been much greater. My analysis sheds new light on the conduct of macroeconomic policy in Spain during the classical gold standard. The level of the exchange rate was key since it helped to improve the terms of trade, promoted exports and raised prices at a time when the West suffered from the problems of deflation. The results in this paper provide new empirical evidence for the core-periphery debate addressing the period of the classical gold standard.

Do the Rules of the Game Matter? Trilemma Regimes and Financial Stability, 1922-2015

German Forero-Laverde

This paper examines the impact of exchange rate regimes on the behaviour of the stock market and credit aggregate’s boom-bust cycle. We run tests on the Bull-Bear Indicators (Forero-Laverde, 2018) for the stock market and credit to GDP of six Western European countries. We find that neither capital controls nor exchange rate regimes seem to matter for the evolution of asset prices or credit aggregates. Following the literature on the macroeconomic trilemma, we proceed to verify the interactions between regimes. Dividing the sample in four groups according to their open/closed capital accounts and fixed/floating exchange rate we do find a distinct behaviour of booms and busts in both series, even after including control variables. Moreover, we identify a different behavior of the Bull-Bear Indicators both in mean and volatility under each of the four scenarios. We exploit these differences to rank regimes according to the (in)stability of assets and credit.

This paper examines the impact of exchange rate regimes on the behaviour of the stock market and credit aggregate’s boom-bust cycle. We run tests on the Bull-Bear Indicators (Forero-Laverde, 2018) for the stock market and credit to GDP of six Western European countries. We find that neither capital controls nor exchange rate regimes seem to matter for the evolution of asset prices or credit aggregates. Following the literature on the macroeconomic trilemma, we proceed to verify the interactions between regimes. Dividing the sample in four groups according to their open/closed capital accounts and fixed/floating exchange rate we do find a distinct behaviour of booms and busts in both series, even after including control variables. Moreover, we identify a different behavior of the Bull-Bear Indicators both in mean and volatility under each of the four scenarios. We exploit these differences to rank regimes according to the (in)stability of assets and credit.

The Political Economy of French Foreign Exchange Control

Julien Brault

Quinn emitted the hypothesis that foreign exchange control was supported by the groups most hurt by capital flows volatility : the rich during the Gold Standard, and the middle-class during the Gold Exchange Standard. We build a new narrative for France, which shows that French foreign exchange and trade controls would have gone, from the interests of cartels and professional associations during the Gold Standard, to a State policy supported by the middle-class and middle-bourgeoisie during the Gold Exchange Standard, to a socialist policy after the 1970s. We build a new dataset of indices of French foreign exchange and trade controls, based on original national legislation, and of the curricula of French politicians and civil servants involved in this policy. We test the interactions between capital account volatility, wealth distribution, the participation of different social layers to the administration and policy-making, and foreign exchange legislation.

Quinn emitted the hypothesis that foreign exchange control was supported by the groups most hurt by capital flows volatility : the rich during the Gold Standard, and the middle-class during the Gold Exchange Standard. We build a new narrative for France, which shows that French foreign exchange and trade controls would have gone, from the interests of cartels and professional associations during the Gold Standard, to a State policy supported by the middle-class and middle-bourgeoisie during the Gold Exchange Standard, to a socialist policy after the 1970s. We build a new dataset of indices of French foreign exchange and trade controls, based on original national legislation, and of the curricula of French politicians and civil servants involved in this policy. We test the interactions between capital account volatility, wealth distribution, the participation of different social layers to the administration and policy-making, and foreign exchange legislation.

The Gold Pool (1961-1968) and the fall of Bretton Woods. Lessons for central bank cooperationAbstract - Bordo et al.

Michael D. Bordo, Eric Monnet and Alain Naef

Central bank cooperation is back to the forefront due to the recent global financial crisis and the persistence of global imbalances. What makes cooperation succeed or fail? The London Gold Pool (1961-1968) was one of the most ambitious cases of central bank cooperation in history. Major central banks pooled interventions to stabilize the dollar price of gold. Why did it collapse? The fate of the Pool was in fact closely tied to sterling. Sterling’s devaluation in November 1967 spurred speculation and massive losses for the Pool. Contagion occurred because US policies were inflationary and insufficiently credible. The end of the Gold Pool provides a striking example of contagion between reserve currencies. This article is based on a large volume of information from the archives of seven central banks and financial institutions. We have built daily series of gold prices, Gold Pool interventions and drawings at the Fed gold window.

Central bank cooperation is back to the forefront due to the recent global financial crisis and the persistence of global imbalances. What makes cooperation succeed or fail? The London Gold Pool (1961-1968) was one of the most ambitious cases of central bank cooperation in history. Major central banks pooled interventions to stabilize the dollar price of gold. Why did it collapse? The fate of the Pool was in fact closely tied to sterling. Sterling’s devaluation in November 1967 spurred speculation and massive losses for the Pool. Contagion occurred because US policies were inflationary and insufficiently credible. The end of the Gold Pool provides a striking example of contagion between reserve currencies. This article is based on a large volume of information from the archives of seven central banks and financial institutions. We have built daily series of gold prices, Gold Pool interventions and drawings at the Fed gold window.

2nd half

Can Greece stay in the euro without the troika? Lessons from 100 years of South-East European monetary history

Matthias Morys

We add a historical and regional dimension to the debate on the Greek debt crisis. Analysing Greece, Romania, Serbia/Yugoslavia and Bulgaria from political independence to WW II, we find strong parallels to the present: repeated cycles of entry and exit from monetary unions, government debt build-up and default, and financial supervision by West European countries. Gold standard membership was more short-lived than in any other part of Europe. Granger causality tests and money growth accounting show that the prevailing pattern of fiscal dominance was only broken under international financial control, when strict conditionality scaled back the treasury’s influence; only then were central banks able to conduct a rule-bound monetary policy and stabilize exchange-rates. The long-run record of Greece suggests that the perennial economic and political objective of monetary union membership can only be maintained and secured if both monetary and fiscal policy remains firmly anchored in a European institutional framework.

We add a historical and regional dimension to the debate on the Greek debt crisis. Analysing Greece, Romania, Serbia/Yugoslavia and Bulgaria from political independence to WW II, we find strong parallels to the present: repeated cycles of entry and exit from monetary unions, government debt build-up and default, and financial supervision by West European countries. Gold standard membership was more short-lived than in any other part of Europe. Granger causality tests and money growth accounting show that the prevailing pattern of fiscal dominance was only broken under international financial control, when strict conditionality scaled back the treasury’s influence; only then were central banks able to conduct a rule-bound monetary policy and stabilize exchange-rates. The long-run record of Greece suggests that the perennial economic and political objective of monetary union membership can only be maintained and secured if both monetary and fiscal policy remains firmly anchored in a European institutional framework.

The Reinterpretation of the Gold Standard and the EMU

Anders Ögren

The classical gold standard has an almost mythical position in the historical annals of international exchange rate systems. One important view on the gold standard has become that adhering to an international monetary arrangement, as belonging to the gold standard club, was to receive a “good housekeeping seal of approval” for the monetary conduct of an economy (Bordo and Rockoff (1996)). In this paper I show that countries did not chose to adhere to the gold standard as a way of disciplining their monetary policy (at a difference from the more lax silver standard), and that this view on the gold standard is an ex-post construction. This ex-post construction of the gold standard fits with the theoretical view on fixed exchange rates as “self disciplining” which arose in the late 1970s and which came to be a decisive factor in the design of the EMU.

The classical gold standard has an almost mythical position in the historical annals of international exchange rate systems. One important view on the gold standard has become that adhering to an international monetary arrangement, as belonging to the gold standard club, was to receive a “good housekeeping seal of approval” for the monetary conduct of an economy (Bordo and Rockoff (1996)). In this paper I show that countries did not chose to adhere to the gold standard as a way of disciplining their monetary policy (at a difference from the more lax silver standard), and that this view on the gold standard is an ex-post construction. This ex-post construction of the gold standard fits with the theoretical view on fixed exchange rates as “self disciplining” which arose in the late 1970s and which came to be a decisive factor in the design of the EMU.

Exchange Rate Systems and Long-term Economic Ggrowth in Indonesia

Pierre van der Eng

This paper analyses the relation between exchange rate systems and economic growth in Indonesia through the real exchange rates that the country’s trade-exposed producers faced. During 1877-1940 monetary policy eliminated exchange risk and encouraged foreign trade and inward investment, at the expense of subjecting trade-exposed domestic producers to terms of trade fluctuations and real exchange rate instability. The 1940-1978 system led to overvalued exchange rates that protected producers for domestic markets, at the expense of evasive business behaviour aimed at minimising the exchange risks caused by overbearing regulations of foreign exchange market and foreign trade, as well as significant limitations on inward foreign investment during the 1950s and 1960s. The 1967-1985 oil boom resolved foreign exchange shortages and facilitated a return to a more realistic and predictable exchange rate since 1978. This softened the impact of terms of trade fluctuations, but limited the international competitiveness of trade-exposed domestic producers.

This paper analyses the relation between exchange rate systems and economic growth in Indonesia through the real exchange rates that the country’s trade-exposed producers faced. During 1877-1940 monetary policy eliminated exchange risk and encouraged foreign trade and inward investment, at the expense of subjecting trade-exposed domestic producers to terms of trade fluctuations and real exchange rate instability. The 1940-1978 system led to overvalued exchange rates that protected producers for domestic markets, at the expense of evasive business behaviour aimed at minimising the exchange risks caused by overbearing regulations of foreign exchange market and foreign trade, as well as significant limitations on inward foreign investment during the 1950s and 1960s. The 1967-1985 oil boom resolved foreign exchange shortages and facilitated a return to a more realistic and predictable exchange rate since 1978. This softened the impact of terms of trade fluctuations, but limited the international competitiveness of trade-exposed domestic producers.

Liam Brunt and Antonio Fidalgo

PPP Exchange Rates versus Par Exchange Rates: very long run evidence for a large sample of countries

Using a large, new dataset of prices for many countries and regions, we create 70 new purchasing power parity (PPP) exchange rates for 1705, 1775, 1845 and 1870. We compare them to par exchange rates, measured as both market rates and official rates (which are highly correlated, since many countries were on a gold or silver standard). We show that PPP rates and par rates differ significantly, making comparisons of real income levels across countries – and their relative growth rates – problematic

Using a large, new dataset of prices for many countries and regions, we create 70 new purchasing power parity (PPP) exchange rates for 1705, 1775, 1845 and 1870. We compare them to par exchange rates, measured as both market rates and official rates (which are highly correlated, since many countries were on a gold or silver standard). We show that PPP rates and par rates differ significantly, making comparisons of real income levels across countries – and their relative growth rates – problematic