Pegxit Pressure: Evidence from the Classical Gold Standard

Abstract

We develop a simple model that highlights the costs and benefits of fixed exchange rates as they relate to trade, and show that negative export-price shocks reduce fiscal revenue and increase the likelihood of an expected currency devaluation.Using a new high-frequency data set on commodity-price movements from the classical gold standard era, we then show that the model's main prediction holds even for the canonical example of hard pegs.We identify a negative causal relationship between export-price shocks and currency-risk premia in emerging market economies, indicating that negative export-price shocks increased the probability that countries abandoned their pegs.

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