Back to Gold: Sterling in 1925
23 Pages Posted: 11 Aug 2015
There are 2 versions of this paper
Date Written: August 2015
Abstract
Expectations of Sterling returning to Gold have been disregarded in empirical work on the US dollar Sterling exchange rate in the early 1920s. We incorporate such considerations in a PPP model of the exchange rate, letting the probability of a return to gold follow a logistic function. We draw several conclusions: (i) the PPP model works well from spring 1919 to spring 1925; (ii) wholesale prices outperform consumer prices; (iii) allowing for a return to gold leads to a higher speed of adjustment of the exchange rate to PPP; (iv) interest rate differentials and the relative monetary base are crucial determinants of the expected return to gold; (v) the probability of a return to Gold peaked at about 72% in late 1924 and but fell to about 60% in early 1925; and (vi) our preferred model does not support the Keynes view that Sterling was overvalued after the return to gold.
JEL Classification: E5, F31, N1
Suggested Citation: Suggested Citation