Core, Periphery, Exchange Rate Regimes and Globalization

81 Pages Posted: 12 Dec 2001

See all articles by Michael D. Bordo

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics; National Bureau of Economic Research (NBER)

Marc Flandreau

Fondation Nationale des Sciences Politiques - Institut d'Etudes Politiques de Paris; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: November 2001

Abstract

In this Paper we focus on the different historical regime experiences of the core and the periphery. Using conventional Feldstein-Horioka tests, but taking a more careful look at the panel properties of our sample, this Paper reports results which are consistent with the 'Folk' wisdom that financial integration was as high before 1914 as it is today. But the evidence suggests that it was not the exchange rate regime followed that mattered for deeper integration but the presence of capital controls. Moreover, we find that the financial integration observed for the recent period is truly an advanced country phenomenon, suggesting that the causality goes from globalization to the exchange rate regime rather than the other way round. We develop this intuition by showing that before 1914, advanced countries adhered to gold while periphery countries either emulated the advanced countries or floated. Some peripheral countries were especially vulnerable to financial crises and debt default in large part because of their extensive external debt obligations denominated in core country currencies. This left them with the difficult choice of floating but restricting external borrowing or devoting considerable resources to maintaining an extra hard peg. Today while advanced countries can successfully float, emergers, who are less financially mature and must borrow abroad in terms of advanced country currencies, are afraid to float for the same reason as their 19th century forbearers. To obtain access to foreign capital they may need a hard peg to the core country currencies, or else can resort to capital controls. Thus the key distinction between the exchange rate regime of core and periphery countries both then and now that we emphasize in this Paper is financial maturity, evidenced in the ability to issue international securities denominated in domestic currency.

Keywords: Core, periphery, exchange rate regimes, Feldstein Horioka tests, financial depth, currency mismatch

JEL Classification: F31

Suggested Citation

Bordo, Michael D. and Flandreau, Marc, Core, Periphery, Exchange Rate Regimes and Globalization (November 2001). CEPR Discussion Paper No. 3077. Available at SSRN: https://ssrn.com/abstract=292885

Michael D. Bordo (Contact Author)

Rutgers University, New Brunswick - Department of Economics ( email )

New Brunswick, NJ
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Marc Flandreau

Fondation Nationale des Sciences Politiques - Institut d'Etudes Politiques de Paris ( email )

27 rue Saint-Guillaume
Paris Cedex 07, 75337
France
+33 1 4046 7265 (Phone)
+33 1 4407 0750 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
26
Abstract Views
1,646
PlumX Metrics