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...
Lire la suite :
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...
Lire la suite :
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FY360° by Finyear is not a finished product: please let us know what you think and if you have a suggestion, a complaint, or something we should link to, email us.
FY360° by Finyear (précédemment Financial Year Links) est un service Finyear dont la mission est de vous faire gagner du temps et de vous tenir informés. Notre équipe suit les actus pertinentes, les organise, créé un lien vers les sources originales et vous les communique sur le site Finyear et dans la newsletter quotidienne.
FY360° by Finyear n'est pas un produit fini : faites-nous savoir ce que vous en pensez et si vous avez une suggestion, une remarque, ou une source que nous devrions suivre, écrivez-nous.
FY360° by Finyear (ex Financial Year Links) is a Finyear service on a mission to save you time and keep you smart. Our team follows the relevant news, summarize it, link to the original sources and deliver it on the Finyear website and in the daily newsletter.
FY360° by Finyear is not a finished product: please let us know what you think and if you have a suggestion, a complaint, or something we should link to, email us.
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