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Jeudi 8 Janvier 2015

FY360° | The price of stability: The balance sheet policy of the Banque de France and the Gold Standard (1880-1914)


The recent focus on central banks’ balance sheet policies has brought new interest to the question of how they deal with the international finance constraint.



This column gives historical perspective to the issue by examining the policies of the Banque de France during the gold standard. The Banque used its domestic portfolio to stabilise interest rates rather than using exchange rate intervention. This sheds new light on the standard view that discount rates and capital controls were the primary monetary policy instruments during the gold standard.

How central banks cope with the international finance constraint in a fixed-exchange-rate regime is an old debate, with the key tradeoffs typically formulated as Mundell’s trilemma (Klein and Shambaugh 2013). This debate has gained new interest with the recent focus on balance sheet policies of central banks, particularly for Asian countries (Aizenman, et al. 2009, BIS 2012). To gain insight into today’s balance-sheets issues, this column looks to the past – specifically how the Banque de France used its domestic portfolio (rather than exchange market intervention) to maintain a stable domestic discount rate during the classical gold standard period (1880-1914) despite varying international rates (Bazot et al. 2014). In short:

- When the Bank of England – the leader of the gold standard – increased its discount rate, the Banque de France expanded its domestic portfolio in order to stabilize the interest rate in the French money market (which had increased with the English rate).
- To conduct such a sterilisation policy required having a large gold stock and, when its gold reserves fell too much, the Banque de France had to increase its discount rate.

Central banks cannot forever escape the constraint of international finance...

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