NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Maurice Obstfeld, Alan M. Taylor

NBER Working Paper No. 9345
Issued in November 2002
NBER Program(s):   DAE   EFG   IFM

What determines sovereign risk? We study the London bondmarket from the 1870s to the 1930s. Our findings support conventional wisdom concerning the low 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 favorably, and markets scrutinized other signals. Public debt and British Empire membership were important determinants of spreads after World War One, but not before.

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Published: Obstfeld, Maurice and Alan M. Taylor. "Sovereign Risk, Credibility And The Gold Standard: 1870-1913 Versus 1925-31," Economic Journal, 2003, v113(487,Apr), 241-275.

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