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Did adhering to the gold standard reduce the cost of capital?

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  • Ron Alquist
  • Benjamin Chabot

Abstract

A commonly cited benefit of the pre-World War One gold standard is that it reduced the cost of international borrowing by signaling a country?s commitment to financial probity. Using a newly constructed data set that consists of more than 55,000 monthly sovereign bond returns, we test if gold-standard adherence was negatively correlated with the cost of capital. Conditional on UK risk factors, we find no evidence that the bonds issued by countries off gold earned systematically higher excess returns than the bonds issued by countries on gold. Our results are robust to allowing betas to differ across bonds issued by countries off- and on-gold; to including proxies that capture the effect of fiscal, monetary, and trade shocks on the commitment to gold; and to controlling for the effect of membership in the British Empire.

Suggested Citation

  • Ron Alquist & Benjamin Chabot, 2010. "Did adhering to the gold standard reduce the cost of capital?," Working Paper Series WP-2010-13, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhwp:wp-2010-13
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    References listed on IDEAS

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    Cited by:

    1. Marc Flandreau & Kim Oosterlinck, 2011. "Was the Emergence of the International Gold Standard Expected? Melodramatic Evidence from Indian Government Securities," Working Papers 0005, European Historical Economics Society (EHES).
    2. Flandreau, Marc & Oosterlinck, Kim, 2012. "Was the emergence of the international gold standard expected? Evidence from Indian Government securities," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 649-669.

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    Keywords

    Gold standard; Bonds;

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