The "Thin Film of Gold": Monetary Rules and Policy Credibility in Developing Countries

40 Pages Posted: 8 Apr 2008 Last revised: 14 Jul 2022

See all articles by Niall Ferguson

Niall Ferguson

Harvard University - Department of History; Stanford University - The Hoover Institution on War, Revolution and Peace

Moritz Schularick

University of Bonn - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: April 2008

Abstract

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.

Suggested Citation

Ferguson, Niall and Schularick, Moritz, The "Thin Film of Gold": Monetary Rules and Policy Credibility in Developing Countries (April 2008). NBER Working Paper No. w13918, Available at SSRN: https://ssrn.com/abstract=1117915

Niall Ferguson (Contact Author)

Harvard University - Department of History ( email )

Cambridge, MA
United States

Stanford University - The Hoover Institution on War, Revolution and Peace

Stanford, CA 94305-6010
United States

Moritz Schularick

University of Bonn - Department of Economics ( email )

Bonn
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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