Target Zones in History and Theory: Lessons from an Austro-Hungarian Experiment (1896-1914)

The first known experiment with an exchange rate band took place in Austria- Hungary between 1896 and 1914. The rationale for introducing this policy rested on precisely those intuitions that the modern literature has emphasized: the band was designed to secure both exchange rate stability and monetary policy autonomy. However, unlike more recent experiences, such as the ERM, this policy was not undermined by credibility problems. The episode provides an ideal testing ground for some important ideas in modern macroeconomics: specifically, can formal rules, when faithfully adhered to, provide policy makers with some advantages such as short term autonomy? First, we find that a credible band has a "microeconomic" influence on exchange rate stability. By reducing uncertainty, a credible fluctuation band improves the quality of expectations, a channel that has been neglected in the modern literature. Second, we show that the standard test of the basic target zone model is flawed and develop an alternative methodology. We believe that these findings shed a new light on the economics of exchange rate bands

Introduction: new research in monetary history - A map

This handbook aims to provide a comprehensive (though obviously not exhaustive) picture of state-of-the-art international scholarship on the history of money and currency. The chapters of this handbook cover a wide selection of research topics. They span chronologically from antiquity to nowadays and are geographically stretched from Latin America to Asia, although most of them focus on Western Europe and the USA, as a large part of the existing research does. The authors of these chapters constitute, we hope, a balanced sample of various generations of scholars who contributed to what Barry Eichengreen defined as "the new monetary and financial history" – an approach that combines the analysis of monetary aggregates and policies with the structure and dynamics of the banking sector and financial markets. We have structured this handbook in ten broad thematic parts: the historical origins of money; money, coinage, and the state; trade, money markets, and international currencies; money and metals; monetary experiments; Asian monetary systems; exchange rate regimes; monetary integration; central banking and monetary policy; and aggregate price shocks. In this introduction, we offer for each part some historical context, a few key insights from the literature, and a brief analytical summary of each chapter. Our aim is to draw a map that hopefully will help readers to organize their journey through this very wide and diverse research area

Credibility and adjustment: gold standards versus currency boards

It is often maintained that currency boards (CBs) and gold standards (GSs) are alike in that they are stringent monetary rules, the two basic features of which are high credibility of monetary authorities and the existence of automatic adjustment (non discretionary) mechanism. This article includes a comparative analysis of these two types of regimes both from the perspective of the sources and mechanisms of generating confidence and credibility, and the elements of operation of the automatic adjustment mechanism. Confidence under the GS is endogenously driven, whereas it is exogenously determined under the CB. CB is a much more asymmetric regime than GS (the adjustment is much to the detriment of peripheral countries) although asymmetry is a typical feature of any monetary regime. The lack of credibility is typical for peripheral countries and cannot be overcome completely even by “hard” monetary regimes.http://deepblue.lib.umich.edu/bitstream/2027.42/40078/3/wp692.pd

Rise and demise of the global silver standard

In the early modern period, the world economy gravitated around the expansion of long-distance commerce. Together with navigation improvements, silver was the prime commodity which moved the sails of such trade. The disparate availability and the particular demand for silver across the globe determined the participation of producers, consumers, and intermediaries in a growing global economy. American endowments of silver are a known feature of this process; however, the fact that the supply of silver was in the form of specie is a less known aspect of the integration of the global economy. This chapter surveys the production and export of silver specie out of Spanish America, its intermediation by Europeans, and the reexport to Asia. It describes how the sheer volume produced and the quality and consistency of the coin provided familiarity with, and reliability to, the Spanish American peso which made it current in most world markets. By the eighteenth century, it has become a currency standard for the international economy which grew together with the production and coinage of silver. Implications varied according to the institutional settings to deal with specie and foreign exchange in each intervening economy of that trade. Generalized warfare in late eighteenth-century Europe brought down governance in Spanish America and coinage fragmented along with the political fragmentation of the empire. The emergence of new sovereign republics and the end of minting as known meant the cessation of the silver standard that had contributed to the early modern globalization

Monetary Union, Trade Integration, and Business Cycles in 19th Century Europe

This paper studies the impact of monetary arrangements on trade integration and business cycle correlation in late 19th century Europe. We estimate a gravity model and show that tighter monetary integration was associated with substantially higher trade, as in recent studies using contemporary data. For instance, the Austro-Hungarian monetary union improved trade between member states by a factor of 3. To explain this, we build and estimate a simple model where greater monetary integration weakens the current account constraint by fostering business cycle co-movements. Copyright Springer Science + Business Media, Inc. 2005optimum currency areas, endogeneity, trade, business cycles, monetary union,