Managing Exchange Rate Crises: Evidence from the 1890's
44 Pages Posted: 9 Jun 2004
Date Written: August 1989
This paper investigates the effectiveness of the monetary authority's borrowing policies in resolving exchange rate crises. It shows why obtaining loans or lines of credit in foreign currency may avoid, at least temporarily, the devaluation of a fixed exchange rate, and discusses the problem of the optimal size of the loan and/or the line of credit. The analysis focuses on a particular episode of foreign exchange rate pressure, during the troubled years between 1894 to 1896. The results suggest that the borrowing policy followed by the U.S. Treasury in those years was effective in avoiding the collapse of the United States' gold standard, and that the amount of the borrowing undertaken by the Treasury might have been optimal.
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