Using ARIMA Forecasts to Explore the Efficiency of the Forward Reichsmark Market

We explore the efficiency of the forward reichsmark market in Vienna between 1876 and 1914. We estimate ARIMA models of the spot exchange rate in order to forecast the one-month-ahead spot rate. In turn we compare these forecasts to the contemporaneous forward rate, i.e., the market's forecast of the future spot rate. We find that shortly after the introduction of a "shadow" gold standard in the mid-1890s the forward rate became a considerably better predictor of the future spot rate than during the prior flexible exchange rate regime. Between 1907 and 1914 forecast errors were between a half and one-fourth of their pre-1896 level. This implies that the Austro-Hungarian Bank's policy of defending the gold value of the currency was successful in improving the efficiency of the foreign exchange market

Using ARIMA Forecasts to Explore the Efficiency of the Forward Reichsmark Market: Austria-Hungary, 1876-1914

We explore the efficiency of the forward Reichsmark market in Vienna between 1876 and 1914. We estimate ARIMA models of the spot exchange rate in order to forecast the one-month-ahead spot rate. In turn we compare these forecasts to the contemporaneous forward rate, i.e., the market's forecast of the future spot rate. We find that shortly after the introduction of a "shadow" gold standard in the mid-1890s the forward rate became a considerably better predictor of the future spot rate than during the prior flexible exchange rate regime. Between 1907 and 1914 forecast errors were between a half and one-fourth of their pre-1896 level. This implies that the Austro-Hungarian Bank's policy of defending the gold value of the currency was successful in improving the efficiency of the foreign exchange market

Using ARIMA Forecasts to Explore the Efficiency of the Forward Reichsmark Market: Austria-Hungary, 1876-1914

We explore the efficiency of the forward Reichsmark market in Vienna between 1876 and 1914. We estimate ARIMA models of the spot exchange rate in order to forecast the one-month-ahead spot rate. In turn we compare these forecasts to the contemporaneous forward rate, i.e., the market's forecast of the future spot rate. We find that shortly after the introduction of a “shadow†gold standard in the mid-1890s the forward rate became a considerably better predictor of the future spot rate than during the prior flexible exchange rate regime. Between 1907 and 1914 forecast errors were between a half and one-fourth of their pre-1896 level. This implies that the Austro-Hungarian Bank's policy of defending the gold value of the currency was successful in improving the efficiency of the foreign exchange market.exchange rate; gold standard; ARIMA; efficiency

Was the Emergence of the International Gold Standard Expected? Melodramatic Evidence from Indian Government Securities

The emergence of the gold standard has for a long time been viewed as inevitable. Fluctuations of the gold-silver exchange rate in world markets were accused to lead to brutal and unsustainable switches of bimetallic countries’ money supplies. However, more recent work has shown that the option character of bimetallism provided a stabilizing feedback loop. Using original data, this paper provides support to the new view. Using quotation prices for Indian Government bonds, we analyze agents’ expectations between 1860 and 1890. The intuition is that the spread between gold and silver bonds issued by the same entity (India) and backed by a credible agent (Britain) is a “pure” measure of the silver risk. The analysis shows that up until 1874 markets were expecting bimetallism to last. It is only after this date that markets gradually started requiring a premium to hold silver bonds indicating their belief that gold would eventually become the only metallic standard.Exchange rate regime, gold standard, bimetallism, credibility, silver risk

Bonds and Brands : intermediaries and reputation in sovereign debt markets 1820-1830

How does sovereign debt emerge and become sustainable? This paper provides a new answer to this unsolved puzzle. Focusing on the early 19th century, we argue that intermediaries’ market power served to overcome information asymmetries and sustained the development of sovereign debt. Relying on insights from corporate finance, we argue that capitalists turned to intermediaries’ reputations to guide their investment strategies. The outcome was a two-tier global bond market, which was sustained by hierarchical relations among intermediaries. This novel theoretical perspective is backed by new archival evidence and empirical data that have never been gathered so far

How to Run a Target Zone? Age Old Lessons from an Austro-Hungarian Experiment

This paper considers what we argue was the first experiment of an exchangerate band. This experiment took place in Austria-Hungary between 1896 and1914. The rationale for introducing this policy rested on precisely thoseintuitions that modern target zone literature has recently emphasized: theband was designed to secure both exchange rate stability and monetarypolicy autonomy. However, unlike more recent experiences, such as theERM, this policy was not undermined by credibility problems. In other wordsthe episode provides us with an ideal testing ground for some importantideas in modern macroeconomics: specifically, can formal rules, whenfaithfully adhered to, provide policy makers with some advantages such asshort term flexibility? First, we find that a credible band has a“microeconomic” influence on exchange rate stability. By reducinguncertainty, a credible fluctuation band improves the quality of expectations,a channel that has been neglected in the modern literature. Second, weshow that the standard test of the basic target zone model is flawed anddevelop an alternative methodology. This enables us to understand whyAustro-Hungarian policy makers were so upbeat about the merits ofexchange rate target zones. We believe that these findings shed a new lighton the economics of exchange rate bands.

The Economics of Badmouthing: Libel Law and the Underworld of the Financial Press in France before World War I

This article analyzes the economics of “badmouthing” in the context of the pre-1914 French capital market. We argue that badmouthing was a means through which racketeering journals sought to secure property rights over issuers’ reputation. We provide a theoretical study of the market setup that emerged to deal with such problems, and we test our predictions using new evidence from contemporary sources.badmouthing, capital market, reputation.

Was the Emergence of the International Gold Standard Expected? Melodramatic Evidence from Indian Government Securities.

The emergence of the gold standard has for a long time been viewed as inevitable. Fluctuations of the gold-silver exchange rate in world markets were accused to lead to brutal and unsustainable switches of bimetallic countries’ money supplies. However, more recent work has shown that the option character of bimetallism provided a stabilizing feedback loop. Using original data, this paper provides support to the new view. Using quotation prices for Indian Government bonds, we analyze agents’ expectations between 1860 and 1890. The intuition is that the spread between gold and silver bonds issued by the same entity (India) and backed by a credible agent (Britain) is a “pure” measure of the silver risk. The analysis shows that up until 1874 markets were expecting bimetallism to last. It is only after this date that markets gradually started requiring a premium to hold silver bonds indicating their belief that gold would eventually become the only metallic standard.Exchange rate regime, gold standard, bimetallism, credibility, silver risk

Core, Periphery, Exchange Rate Regimes, and Globalization

In this paper we focus on the different historical regime experiences of the core and the periphery. Before 1914 advanced countries adhered to gold while periphery countries either emulated the advanced countries or floated. Some peripheral countries were especially vulnerable to financial crises and debt default in large part because of their extensive external debt obligations denominated in core country currencies. This left them with the difficult choice of floating but restricting external borrowing or devoting considerable resources to maintaining an extra hard peg. Today while advanced countries can successfully float, emergers who are less financially mature and must borrow abroad in terms of advanced country currencies, are afraid to float for the same reason as their nineteenth century forbearers. To obtain access to foreign capital they may need a hard peg to the core country currencies. Thus the key distinction between core and periphery countries both then and now that we emphasize in this paper is financial maturity, evidenced in the ability to issue international securities denominated in domestic currency. Evidence in Section 2 from Feldstein-Horioka tests 1880-1997 agrees with the 'Folk' wisdom that financial integration was as high before 1914 as it is today. But the evidence suggests that it was not the exchange rate regime followed that mattered but the presence of capital controls. Moreover the financial integration observed for the recent period is largely an advanced country phenomenon Section 3 lays out the financial maturity hypothesis, presents narrative evidence for the pre-1914 period of the different experiences of the core and peripheral countries in adhering to the gold standard, and documents that for the emerging countries, plus ca change. Finally, Section 4 presents empirical evidence for core and peripheral countries 1880-1913 and today based on traditional money demand regressions suggesting a strong link between financial depth and the exchange rate regime.