Devaluation/MP 1920s

Question 1

Return to gold timing?

Answer 1

Return in April 1925 after being forced to leave 1919 as don’t have necessary gold reserves
Effects largely felt 1920-21 through expectations!

Question 2

Estimates of overvaluation 1920s?

Answer 2

Relative to 1913
Keynes (using PPP): Pound 10% overvalued 1925
Redmond (1984): RER peaked 1925-6
Solomou and Vartis (2005): RER peaked 1921. 23% over in 1921 and 13% over in 1925

Question 3

Why Solomou and Vartis&raquo_space;» Redmond

Answer 3

More consistent with X behaviour

More consistent with macro theory

Question 4

X behaviour overvaluation

Answer 4

1920-21 X as 50% of 1913 level
1925: X as 2/3 of 1913 level
Overvaluation leads to uncompetitive X

Question 5

Macro theory overvaluation

Answer 5

RER=eP/P*
Contractionary MP leads to e appreciating: LM shifts left in (e,Y) and P down (QT of money)
e up is SR, P down is LR (especially as LRAS shift in leads to P up)
Thus, in 1921, we see e up»»P down so greatest overvaluation in SR after policy announcement!!

Question 6

Perceived adv of gold stand?

Answer 6

Fixed currency reduces trade volatility

Network effects: the more who join the better for all!

Question 7

Rejoin at prewar parity?

Answer 7

Cunliffe commitee (Jan 1918): Rejoin at prewar parity
Assumption of classical dichotomy: Level does not matter and contractionary MP will have no effect!
Devaluation would show economic weakness and potentially encourage future speculation

Question 8

Pre war parity vs depreciated?

Answer 8

Depreciated ER correlated with better performance (output gaps)
Assuming PPP (at least relative) domestic fall in inflation required to reach pre war parity.

Question 9

Impact of overvaluation on trade?

Answer 9

Moggridge 1972: Estimated elasticities at X=1.5, M=0.5, meaning ML satisfied.
The deterioration of the trade balance*1.75 mult = the loss of 750k jobs!
Consider hysteresis of this on both trade and jobs!

Question 10

Overvaluation on growth?

Answer 10

Solomou (1996): regress growth vs ER regime

Prewar parity countries permanently on lower growth plane!

Question 11

Effect of overvaluation on r?

Answer 11

Solomou 1996: Early 1920s r>20%: as i high, deflationary expectations.
G cannot compensate as balanced budget is a pillar of Gold standard!

Question 12

Impact of deval on wages / Ue?

Answer 12

Deflation+nom. wage inertia led to rise in real wages 1921 (Feinstein)
Broadberry (1984): Ue correlated with return to 1913 parity

Question 13

Hysteresis trade effects of RTN to gold

Answer 13

By 1929, X still only 80% of 1913 and M up significantly

Question 14

Eichengreen model of depreciators vs 1913 parity returners?

Answer 14

Depreciators benefited SR, but gains were lost due to increase in inflation.
But, Solomou suggests the study is too narrow, collecting data from 1921-7 only!
Hysteresis effects?

Question 15

Theoretical paper: Real overvaluation from announcing back to gold stand?

Answer 15

Dornbush (1975): Over time, extent of overvaluation falls!