Interesting bit of research here from the Chicago Fed. The gold standard has often been advocated because it supposedly reduced the cost of capital. These findings show no such thing:
“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.”
gold_stdrd
Source: Chicago Fed
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
Comments are closed.