Adoption of the Gold Standard and Real Exchange Rates in the Core and Periphery, 1870-1913

Abstract

In this paper I estimate the speed of adjustment to shocks to real effective exchange rates (REERs) during the gold standard years. Adoption of the gold standard by the United States in 1879 resulted in all four core countries (France, Germany, the United Kingdom and the United States) being fully committed to gold. I use the concept of half-life (HL) to measure the time it takes for a deviation from purchasing power parity (PPP) to dissipate by 50%. Relative to the years 1870-1913, between 1880 and 1913 the half-lives of REERs in core countries decrease from between 4.4 and 5.2 years to between 3.1 and 3.4 years, with similar declines across dynamic panels. Combined with evidence elsewhere that interest rates adjusted quickly, the evidence herein suggests that adjustment in goods markets was faster following adoption of the gold standard.