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'Water Seeks a Level”: Modeling Bimetallic Exchange Rates and the Bimetallic Band

Author

Listed:
  • Marc Flandreau

    (Sciences Po - Sciences Po, GEM - Groupe d'économie mondiale - Sciences Po - Sciences Po, Centre for Finance and Development - GRADUATE INSTITUTE OF INTERNATIONAL AND DEVELOPMENT STUDIES)

Abstract

Arbitrage costs are usually treated as a mere footnote in formal analyses of bimetallism. At the same time, recent empirical research has demonstrated their key importance, since they produced a "bimetallic band". This paper provides the first model of bimetallism that takes this explicitly into account and uses it to explain a number of stylized features of the French bimetallic experience 1850-1870. First, the model explains the association between the location of the price ratio within its band and the nature (either cross or joint) of specie flows. Second, it explains the correlation between bimetallic exchange rates and the bimetallic ratio. And third, it explains the two-humps distribution of the bimetallic ratio. This analysis leads to a reconsideration of bimetallism: the fluctuations of the price ratio are no longer evidence of the collapse of bimetallism, but are part of the normal functioning of a bimetallic system.

Suggested Citation

  • Marc Flandreau, 2002. "'Water Seeks a Level”: Modeling Bimetallic Exchange Rates and the Bimetallic Band," Post-Print hal-03416703, HAL.
    • Handle: RePEc:hal:journl:hal-03416703
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    Citations

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    Cited by:

    1. Flandreau, Marc & Sussman, Nathan, 2004. "Old Sins: Exchange Rate Clauses and European Foreign Lending in the 19th Century," CEPR Discussion Papers 4248, C.E.P.R. Discussion Papers.
    2. 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).
    3. repec:spo:wpmain:info:hdl:2441/324 is not listed on IDEAS
    4. Esteves, Rui Pedro & Reis, Jaime & Ferramosca, Fabiano, 2009. "Market Integration in the Golden Periphery. The Lisbon/London Exchange, 1854-1891," Explorations in Economic History, Elsevier, vol. 46(3), pages 324-345, July.
    5. 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.
    6. Bignon, Vincent & Flandreau, Marc, 2018. "The Other Way: A Narrative History of the Bank of France," CEPR Discussion Papers 13138, C.E.P.R. Discussion Papers.
    7. Marc Flandreau & Nathan Sussman, 2004. "Old sins. Exchange Clauses and European Foreign Lending in the 19th Century," Working Papers hal-01065494, HAL.
    8. repec:hal:spmain:info:hdl:2441/324 is not listed on IDEAS
    9. Peter Kugler, 2011. "Financial Market Integration in Late Medieval Europe: Results from a Threshold Error Correction Model for the Rhinegulden and Basle Pound 1365-1429," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 147(III), pages 337-352, September.
    10. repec:spo:wpecon:info:hdl:2441/324 is not listed on IDEAS
    11. repec:hal:wpspec:info:hdl:2441/324 is not listed on IDEAS

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