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Journal Article

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

Maurice Obstfeld and Alan M. Taylor
The Economic Journal
Vol. 113, No. 487 (Apr., 2003), pp. 241-275
Published by: Wiley on behalf of the Royal Economic Society
Stable URL: http://www.jstor.org/stable/3590320
Page Count: 35
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Sovereign Risk, Credibility and the Gold Standard: 1870-1913 versus 1925-31
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Abstract

What determines sovereign risk? We study the London bond market from the 1870s to the 1930s. Our findings support conventional wisdom concerning the low credibility of the inter-war gold standard. Before 1914 gold standard adherence effectively signalled credibility and shaved up to 30 basis points from country borrowing spreads. In the 1920s, however, simply resuming prewar gold parities was insufficient to secure benefits. Countries that devalued before resumption were treated more favourably, and markets scrutinised other signals. Public debt and British Empire membership were important determinants of spreads after World War One, but not before.

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