The "Thin Film Of Gold": Monetary Rules and Policy Credibility In Developing Countries

Niall Ferguson, Moritz Schularick

NBER Working Paper No. 13918
Issued in April 2008
NBER Program(s):Development of the American Economy, International Trade and Investment, International Finance and Macroeconomics, Monetary Economics

This paper asks whether developing countries can reap credibility gains from submitting policy to a strict monetary rule. Following earlier work, we look at the gold standard era (1880-1914) as a "natural experiment" to test whether adoption of a rule-based monetary framework such as the gold standard increased policy credibility. On the basis of the largest possible dataset covering almost sixty independent and colonial borrowers in the London market, we challenge the traditional view that gold standard adherence worked as a credible commitment mechanism that was rewarded by financial markets with lower borrowing costs. We demonstrate that in the poor periphery -- where policy credibility is a particularly acute problem -- the market looked behind "the thin film of gold". Our results point to a dichotomy: whereas country risk premia fell after gold adoption in developed countries, there were no credibility gains in the volatile economic and political environments of developing countries. History shows that monetary policy rules are no short-cut to credibility in situations where vulnerability to economic and political shocks, not time-inconsistency, are overarching concerns for investors.

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Document Object Identifier (DOI): 10.3386/w13918

Published: European Review of Economic History (2012) 16 (4): 384-407. doi: 10.1093/ereh/hes006 First published online: October 19, 2012

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