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Exchange Rate Regimes, Globalization, Financial Crises, and Monetary Policy A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Bordo, Michael D. Article Exchange rate regimes, globalization, financial crises, and monetary policy NBER Reporter Online Provided in Cooperation with: National Bureau of Economic Research (NBER), Cambridge, Mass. Suggested Citation: Bordo, Michael D. (2006) : Exchange rate regimes, globalization, financial crises, and monetary policy, NBER Reporter Online, National Bureau of Economic Research (NBER), Cambridge, MA, Iss. Winter 2006/07, pp. 10-13 This Version is available at: http://hdl.handle.net/10419/61885 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Research Summaries Exchange Rate Regimes, Globalization, Financial Crises, and Monetary Policy Michael D. Bordo* My research in the past decade has con- Today while advanced countries can market that mitigated these effects involved centrated largely on four related themes successfully float, emergers who are less significant start-up costs, while the impor- that I discuss in this article: Exchange Rate financially mature and must borrow abroad tance of scale suggests that network exter- Regimes, Globalization, Financial Crises, in advanced country currencies are afraid to nalities and liquidity were pivotal in the and Monetary Policy. float, for the same reason as their nineteenth emergence of overseas markets in domestic century forbearers were. To obtain access to currency debt.5 Exchange Rate Regimes foreign capital, they may need a hard peg to The limiting case of a fixed exchange the core country currencies. In my paper with rate regime is a monetary union. My study As discussed in the Fall 999 NBER Marc Flandreau the key distinction between of the history of monetary unions (MUs) Reporter, much of my earlier work focused core and periphery countries, both then with Lars Jonung 6—based on the exam- on the gold standard and related mone- and now, is financial maturity, evidenced in ples of the United States, Germany, and tary regimes. A series of papers with Finn the ability to issue international securities Italy — suggests that the success of MUs Kydland, Ronald MacDonald, and Hugh denominated in domestic currency3 (or the of the past has been intimately linked with Rockoff emphasized the importance of absence of “original sin”, a phrase coined by both fiscal and political unification. The credible commitment mechanisms in the Eichengreen and Haussman (999)4). implementation of EMU was largely driven design of monetary regimes, focusing on the However, a case study by Chris Meissner, by the political will of elites and its ultimate gold standard. My recent work extends this Angela Redish, and myself of the debt history success may also depend upon the political approach. of several former colonies of Great Britain will of the citizenship. The choice of exchange rate regimes, (the United States, Canada, Australia, New between fixed and floating exchange rates, Zealand, and South Africa), who had largely Globalization evolved considerably in the past hundred overcome the problem of original sin by the years.2 Before 94, advanced countries third quarter of the twentieth century, finds Globalization—the integration of adhered to gold while periphery countries that sound fiscal institutions, high credibility goods, labor, and capital markets — has been either emulated the advanced countries or of the monetary regimes, and good financial one of the dominant issues in the past sev- floated. Some peripheral countries were development are not sufficient to completely eral decades. The present era of globaliza- especially vulnerable to financial crises and break free from original sin. Conversely, tion was preceded by an earlier era in the late debt default, in large part because of their poor performance in these policy realms is nineteenth century — from 870 to World extensive external debt obligations denomi- not, for the most part, a necessary condition War I. Globalization in historical perspec- nated in core country currencies. This left for Original Sin. The factor we emphasize tive was the subject of a recent NBER con- them with the difficult choice of floating for the common progress toward borrowing ference volume, edited with Alan Taylor but restricting external borrowing or devot- in domestic currencies across the five coun- and Jeffrey Williamson. The articles in the ing considerable resources to maintaining an tries is the presence of shocks, such as wars, book covered many aspects of the globaliza- extra hard peg. massive economic disruption, and the emer- tion experience, including the integration gence of global markets. The differences in of markets, growth convergence, inequal- *Bordo is a Research Associate in the NBER’s evolution between the United States and ity, financial development, the transmission Programs on Monetary Economics and the the Dominions we attribute to differences in of shocks, and the political economy of the Development of the American Economy. size, the role of a key currency, which charac- backlash in the interwar period that ended He is also a Professor of Economics at terized the United States and not the others, the first era of globalization. Rutgers University. During 200–7, he and to membership in the British Empire. My research with Barry Eichengreen is the Pitt Professor of Economic History The importance of major shocks suggests and Douglas Irwin7 focused on a compari- at Cambridge University and a Fellow at that the establishment of a domestic bond son of the record of financial and commer- Kings College Cambridge. 10 NBER Reporter Winter 2006/7 cial globalization in the two eras of global- policies. One possible determinant of cri- 973–98, with countries in the same region ization.8 The empirical evidence we survey ses in emerging countries is the presence of not receiving assistance, suggests that the suggests that, while in some respects the original sin. real performance of the former group was financial integration of the pre-94 era My work with Chris Meissner finds, in possibly worse than the latter. Similar results remains unsurpassed, in other respects both eras of globalization, an increased prob- are obtained after adjusting for self-selection today’s financial markets are even more ability that emerging countries with original bias and counterfactual policies7. closely integrated than those in the past. sin experienced debt, currency, and bank- The difference today is that new informa- ing crises. Furthermore, crises were more Monetary Policy tion-generating-and-processing technolo- likely to be a problem for middle-income gies have reduced the market-segmenting emerging countries that were less financially Economic history has long provided effects of asymmetric information. In con- developed. In the first era of globalization, a useful laboratory for the practitioners of sequence, the range of financial claims that countries like Italy, Portugal, Argentina and monetary policy. My research in the area has are traded internationally has broadened. Brazil were more crisis-prone than Australia, focused on deflation and monetary policy While in the past entities (governments, Canada, Denmark, and Sweden. and asset prices. railroads, and mining companies) with tan- Another part of this research program Deflation in historical perspective gible and therefore relatively transparent focuses on the transmission of financial cri- assets were predominant, now international ses. Antu P. Murshid and I (2000)2 pres- The return in the 990s to an environ- investors transact freely in a much broader ent evidence from weekly data on sovereign ment of low inflation has raised the spec- range of securities. bond prices and interest rates for episodes of ter in the United States of deflation and the We also find that the commercial inte- financial turbulence from 880 to 997. We collapse of prices such as occurred in the gration before World War I was more lim- find little evidence for contagion, defined 930s. My work with Angela Redish focuses ited. Given that integration today is even as an incidence in bilateral cross-market on the deflationary experience of 870–96 more pervasive than a hundred years ago, it correlations, adjusted for heteroscedastic- during the pre-94 classical gold standard is surprising that trade tensions and finan- ity. However, we do find evidence sugges- period. That episode has resonance for today cial instability have not been worse in recent
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