American Economic Association
Exchange-Rate Regimes and International Trade: Evidence from the Classical Gold Standard
Era
Author(s): J. Ernesto López-Córdova and Christopher M. Meissner
Source: The American Economic Review, Vol. 93, No. 1 (Mar., 2003), pp. 344-353
Published by: American Economic Association
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Trade:
Exchange-RateRegimes and International
Evidence from the Classical Gold Standard Era
M. MEISSNER*
ANDCHRISTOPHER
By J. ERNESTOLOPEZ-CORDOVA
The late nineteenth century experienced a
profound rise in commercial integration (see
Michael D. Bordo et al., 1999; Kevin H.
O'Rourke and Jeffrey G. Williamson, 1999).
Interestingly, this watershed in global history
also witnessed a large amount of institutional
change. For instance, a vast majorityof countries adoptedthe gold standardafter 1870, and a
number of currency unions consisting of economically significantcountriesappearedon the
scene. Many observers in the late nineteenth
century argued that disparate monetary regimes and separate national currencies were
barriers to trade which stifled international
commerce. The question then arises: how did
institutional arrangements such as currency
unions and monetary regimes like the gold
standardaffect globalization in the late nineteenth century?
To find out we use a gravity model of trade,
controlling for geographic, economic, and political factors, exchange-rate volatility, monetary union membership,and commodity money
regime coordination.1In qualitative terms we
find strongevidence that coordinationon a similar commoditymoney regime is correlatedwith
higher trade and some evidence that monetary
unions are associated with large increases in
trade. However, our results vary depending
upon the exact specification of our model. For
instance, when we control for observable characteristics and unobservable heterogeneity at
the country level we find that gold standard
countriestradeup to 30 percentmore with each
other than with nations not on gold.
In Section I we highlight previous research
along these lines and give a bit of historical
backgroundto the issues. Section II presentsour
data. In Section III we exhibit our results. We
conclude by noting that global tradecould have
been approximately20 percent lower between
1880 and 1910 if no countryhad decided to join
the gold standard.
I. HistoricalBackgroundand PreviousWork
A. Previous Work
Marc Flandreau (2000) was apparentlythe
first to use a gravity approachon nineteenth* L6pez-C6rdova: Inter-AmericanDevelopment Bank,
century trade data. He controls only for the
INT/ITD Stop W608, 1300 New York Avenue NW, Washington, DC 20577 (e-mail: [email protected]); Meissner:
productof total tradefor each of the two counKing's College and Faculty of Economics, Austin Robinson
tries, distance, sharing a border, and memberBuilding, University of Cambridge, Sidgwick Avenue,
ship in the Latin Monetary Union or the
Cambridge CB3 9DD, England (e-mail: chris.meissner@
Scandinavian Monetary Union (the latter in
econ.cam.ac.uk).The authorsthank PranabBardhan,Brad
1880 only). His results suggest thatmembership
Maurice
Obstfeld,
DeLong, BarryEichengreen,LarryKarp,
Christina Romer, Andrew Rose, and Jeff Williamson for
in the Latin Monetary Union or the Scandinatheir comments and guidance. Seminar participants at
vian MonetaryUnion could not explain bilateral
Berkeley and the Cliometrics Conference, along with two
trade flows in 1860, 1870, or 1880. To the best
anonymous referees, provided helpful suggestions. Andy
of our knowledge, the only other work investithis
data.
Rose encouragedus to use a gravity model with
We thank him for inspiring us. The Institutefor Business
and Economic Research(IBER) at Berkeley and the John L.
Simpson Fellowship from the Institute for International
' The gravityequationhas strongtheoreticalsupport(see
Studies at Berkeley graciouslyprovidedfinancialassistance
Alan V. Deardorff, 1998, as well as Simon J. Evenett and
for this project.We also thankRocio Aguilera for excellent
Wolfgang Keller, 1998). JamesE. Anderson(1979) also has
help with the data. Any errors are our own. The opinions
an earlier theoreticalderivation.Our empirical approachis
expressed herein are those of the authorsand do not necessimilar to Andrew K. Rose's (2000) study of currency
sarily reflect the official position of the IDB or its member
unions and trade in the late twentieth century.
countries.
344
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VOL.93 NO. 1 L6PEZ-C6RDOVAAND MEISSNER:GLOBALTRADEAND THE GOLD STANDARD
345
TABLE 1-MONETARY REGIMESOF THECOUNTRIES
INCLUDEDIN THEBASELINESAMPLE
Country
U.K.
Australia
New Zealand
Canada
U.S.
France
Belgium
Switzerland
Italy
Denmark
Norway
Sweden
Germany
Netherlands
Finland
Austria
Russia
Spain
Portugal
Japan
Brazil
Mexico
Chile
Argentina
Egypt
India
China
Indonesia
Philippines
Total number
of countries
Total number
of country-pairs
MonetaryUnion
(MU)
Year
1870
1875
1880
1885
1890
1895
1900
1905
Gold
Gold Gold Gold Gold Gold Gold Gold
Sterling union
Gold
Gold Gold Gold Gold Gold Gold Gold
Sterling union
Gold
Gold Gold Gold Gold Gold Gold Gold
Sterling union
Gold
Gold Gold Gold Gold Gold Gold Gold
Sterling, U.S./Canada
U.S./Canada
Paper
Paper Gold Gold Gold Gold Gold Gold
Latin MU
Bimetal Bimetal Gold Gold Gold Gold Gold Gold
Latin MU
Bimetal Bimetal Gold Gold Gold Gold Gold Gold
Latin MU
Gold Gold
Latin MU
Paper
Paper Paper Gold Gold Paper Paper Paper
ScandinavianMU
Silver
Gold Gold Gold Gold Gold Gold Gold
ScandinavianMU
Silver
Gold Gold Gold Gold Gold Gold Gold
ScandinavianMU
Silver
Gold Gold Gold Gold Gold Gold Gold
Silver
Gold Gold Gold Gold Gold Gold Gold
Silver
Gold Gold Gold Gold Gold Gold Gold
Silver
Silver Gold
Gold
Paper
Paper
Gold
Paper
Paper
Bimetal
Paper
Paper Paper
Gold
Gold
Paper
Silver
Paper Silver Silver Gold Gold
Paper
Paper
Paper Paper
Silver
Silver
Silver Gold
Paper Paper
Paper
Paper Gold
Gold
Silver
Silver
Gold Gold
Silver
Silver
Silver
Silver Silver
Silver
1910
Gold
Gold
Gold
Gold
Gold
Gold
Gold
Gold
Paper
Gold
Gold
Gold
Gold
Gold
Gold
Paper
Gold
Gold
Gold
Paper
Gold
Gold
Silver
23
14
14
14
22
14
28
23
23
90
56
59
70
139
81
274
189
182
Note: "-" indicates that the country was not included in the sample during a given year.
Source: Based on Meissner (2002).
gating the effect of currency unions on trade
in the 1800's is work by Flandreau and
Mathilde Maurel (2001). This work is based
on a limited European sample, and finds that
monetary unions in Scandinavia and in Austria-Hungary may have increased international trade twofold.
Preliminaryunpublishedwork by Antoni Estevadeordal et al. (2001) finds that the gold
standardis significantly associated with bilateral trade in 1913 and in the inter-warperiod.
We believe our work is the first to use both
currency unions and commodity regime data
(i.e., not just gold standard adherence) in the
same study. Furthermore,no study to date has
similar country coverage in the data as we
have, and none have taken advantage of the
time-series evidence or accounted for commodity money regime coordination in general
as we do.
B. CommodityMoney Regimes, Currency
Unions, and Trade:A Brief History
Table 1 presents the countries in our sample and their monetary regime at any one
time. Notably by 1905 most nations were de
jure if not de facto gold standard countries.
This change was precipitated by discussions
focusing on the transaction-cost saving and
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346
THEAMERICANECONOMICREVIEW
(L)
tially to "remedy the inconvenience to trade
between their respective countries resulting
from the diversity of their small silver coin"
[Luca Einaudi, 2001; see also IngridHenriksen
and Niels Kaergard (1995) and Krim Talia
(2001)]. Australia and New Zealand used the
pound sterling,which apparentlyhad to do with
close colonial relationshipswith England (S. J.
Butlin, 1986).
50
40
/
0t
/
20
._187- --1875 1
1870
1875 1880
1 __
1885
-
- ----
1890 1895
Year
1900
1905
MARCH2003
1910
1870-1910
FIGURE
1. REGIME
COORDINATION,
trade-creatingbenefits of regime coordination.2
Figure 1 presents the percentage of countrypairs in our sample sharing a similar monetary
regime in the nineteenthcentury. Much of this
increase is accountedfor by fiat regimes in the
peripherybecoming gold standardregimes, but
the more developed countries of the time also
witnessed a rise in coordination. Importantly,
the lags in the adoption of the gold standard
among countries, leading to varying configurations of coordination across time and space,
give us unique evidence on the impact of monetary regimes on internationaltrade.
During the period we study, a number of
principalcountries of the world participatedin
some form of a monetary union (see Table
1, column 2). If monetaryunions were formed
because of existing tradepatternsour econometric results may be exposed to endogeneityproblems, but their establishment may have been
driven by other factors.
Historyis not decisive on the issue. American
republicsconcluded that the only benefits from
a hypothetical American Monetary Union
would accrue to tourists (GuillermoSubercaseaux, 1915). In Scandinaviaand westernEurope,
unions were formed in part to cooperatively
coerce nationsinto coining currencyof a similar
weight and fineness as their neighbors and par2 For modem
analyses see Bordo and Anna Schwartz
(1996), Eichengreen and Flandreau (1996), Flandreau
(1996), and Meissner (2002). For contemporarydebatesand
positions, see, for example: United States MonetaryCommission (1879, p. 331); Henry Benajah Russell (1898, p.
100); CountMatsukataMasayoshi(1899, p. 191); and Commission on InternationalExchange (1904, pp. 94, 120).
II. Data
Our baseline regressions use an unbalanced
panel consisting of 1,140 country-pairobservations.3 The data cover the period 1870 to 1910
at five-year intervals. On average we have four
observations over time for each country-pair.
The numberof countriesthat generateour pairwise observations is larger toward the end of
our sample period as Table 1 illustrates.
We complementeda data set put togetherby
Katherine Barbieri (1996) with information
from national statistical yearbooks and other
publicationsfrom the period;a detaileddescription of our sources appearsin our workingpaper
(Lopez-Cordova and Meissner, 2000). Trade
figures were transformedinto 1990 U.S. dollars
using a U.S. consumer price index and annual
average exchange rates.
Informationon every country's monetaryregime was used to create dummy variablesindicating whether any pair of countries shared a
common monetary standardor a common currency. In Table 1 we reportthe regimes for each
country that enters our baseline regression
based on datafrom Meissner (2002). In our data
set we have just over 100 observations (i.e.,
roughly 10 percentof our sample)whereboth of
the tradingpartnersare in a monetaryunion.
We constructed our measure of exchangerate volatility as the standarddeviation of the
first difference of the naturallogarithm of the
monthlybilateralexchange rate for the previous
three years. We also control for the effect of
tradepolicy on bilateralexchange by insertinga
dummy if two countries shared a trade agreement with a most-favorednation (MFN) clause.
The standarddistancevariable(the logarithmof
3 More informationabout the data and the sources are
available in the full working paper.
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VOL 93 NO. 1 LOPEZ-C6RDOVAAND MEISSNER:GLOBALTRADEAND THE GOLD STANDARD
347
TABLE2-SAMPLE AVERAGES,POOLEDAND ANNUALOLS REGRESSIONS
OLS regressions
Sample averages
Variable
(1)
(2)
(3)
(4)
(5)
Not on the On the Not in a
In a
Baseline
gold monetary monetary
gold
standard standard union
union
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
1870
1875
1880
1885
1890
1895
1900
1905
1910
0.167
0.396
-1.102
1.995
-0.899
0.209
0.373
0.163
0.073
0.282
19.82
(0.044)
0.861
(0.190)
0.817
(0.246)
0.780
(0.917)
1.047
(0.971)
0.906
(0.364)
0.736
(0.340)
1.064
(0.070)
0.822
(0.172)
0.991
(0.082)
0.886
(1.9)
15.92
(0.028)
0.656
(0.095)
1.617
(0.097)
1.519
(0.097)
1.120
(0.091)
1.268
(0.089)
0.991
(0.112)
0.559
(0.055)
0.825
(0.076)
0.298
(0.052)
0.291
(0.8)
7.82
(0.63)
7.14
(0.081)
-0.661
(0.280)
-0.349
(0.325)
-0.724
(0.404)
-0.977
(0.306)
-0.888
(0.412)
-0.912
(0.533)
-0.755
(0.157)
-0.607
(0.172)
-0.672
(0.140)
-0.520
(1.25)
0.12
(1.12)
0.082
(1.4)
0.36
(0.045)
0.625
(0.210)
1.506
(0.165)
0.931
(0.156)
0.195
(0.140)
0.184
(0.141)
0.529
(0.196)
-0.023
(0.099)
0.645
(0.126)
0.503
(0.090)
0.697
(0.303)
0.02
(0.32)
0.09
(0.27)
0.02
(0.48)
0.45
(0.122)
0.927
(0.366)
0.143
(0.379)
0.401
(0.377)
0.970
(0.374)
0.439
(0.371)
0.514
(0.417)
0.917
(0.275)
1.088
(0.405)
0.816
(0.274)
0.465
Common
(0.14)
0.06
(0.3)
0.18
(0.14)
0.07
(0.45)
0.64
(0.293)
0.165
(0.615)
0.611
(0.788)
0.545
(0.778)
-0.076
(0.862)
0.046
(1.026)
0.799
(0.714)
-0.488
(0.709)
0.228
(0.695)
-0.214
(0.907)
0.078
language
MFN
(0.24)
0.45
(0.38)
0.6
(0.25)
0.56
(0.48)
0.28
(0.167)
0.142
(0.411)
0.187
(0.506)
-0.346
(0.354)
0.030
(0.303)
0.234
(0.585)
0.370
(0.350)
-0.028
(0.301)
-0.102
(0.555)
0.139
(0.236)
0.287
(0.5)
(0.49)
(0.5)
(0.45)
Constant
(0.095)
-18.438
(0.344)
-34.649
(0.287)
-28.406
(0.308)
-29.905
(0.252)
-26.777
(0.306)
-18.849
(0.350)
-22.036
(0.205)
-21.114
(0.246)
-15.682
(0.190)
-15.030
(1.392)
0.765
(5.121)
1.479
(5.335)
(6.502)
(5.044)
(6.281)
-0.307
(7.781)
-
(3.134)
(3.105)
-
(2.456)
Silver
Bimetal
(0.394)
-0.303
(0.410)
-0.366
-0.987
Gold
(0.269)
0.479
(0.282)
1.583
(0.529)
0.894
2.603
0.191
-0.465
1.993
0.449
0.161
0.662
Monetaryunion
(0.124)
0.716
(0.490)
0.129
(0.320)
-0.138
(0.733)
2.558
(0.681)
0.737
(0.371)
0.363
(0.460)
1.448
(0.256)
0.380
(0.306)
0.933
(0.250)
0.778
(0.186)
(0.404)
(0.662)
(0.817)
(0.784)
(0.646)
(0.477)
(0.459)
(0.575)
(0.408)
1,140
0.595
1.453
90
0.673
56
59
70
139
81
274
189
182
0.852
0.835
0.794
0.486
0.753
0.567
0.568
0.650
1.134
0.877
0.963
1.172
1.755
1.310
1.550
1.643
1.215
1.94
0.42
1.24
GDP
(1.79)
20.75
(0.54)
20.57
(1.51)
20.75
GDP per capita
(1.55)
15.05
(1.79)
15.84
(1.64)
15.4
Distance
(0.691)
7.93
(0.7)
7.6
Border
(1.04)
0.102
Political union
Volatility
0
-
-
-
(1.230)
-
-
-
-
Number of
observations
R2
Root MSE
518
622
1,022
118
Notes: Dependent variable is In(trade).Standarderrorsare reportedin parentheses.For regressions these are heteroskedasticityrobust.
great circle distance between capitals) is the
literature's proxy for transportationcosts and
was takenfrom Rose (2000). We includedcommon language, common border, and year-specific indicators. We also created a "political
union" dummy encompassing a colonial relationship-colony-colonizer and colonies with
the same colonizer-as well as countries that
formed a single political entity.
Table 2, columns (1)-(4), shows that the levels of the regressors are reasonably similar for
countries on and off the gold standard.After
adoptingthe gold standardor a currencyunion,
nations had slightly higher levels of GDP per
person than those that did not. Additionally,
these countries were more likely to be geo-
graphically closer, as indicated by the mean
distance coefficient and the common border
variable. Countries in a monetary union were
also more likely to have a political union and to
share a common language.4
4 Formal statistical
tests reject the equality of means
between both groups for all variables except border and
the product of GDP for gold and non-gold countries. The
issue raises Torsten Persson's (2001) critique on Rose.
Namely, our findings may be spurious because of selection on observables or nonlinear associations. By interacting our institutional variables with other explanatory
variables, we found no evidence that nonlinearities can
explain our findings on the gold standardcoefficient while
statistical significance of the currency union estimates decline when we include such effects. The results of those
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348
THEAMERICANECONOMICREVIEW
III. BaselineResults
In column (5) of Table 2 we report pooled
ordinary least-squares (OLS) estimates of the
regressionof the naturallogarithmof real trade
levels on our set of covariates. Throughoutwe
present White heteroskedasticity-robuststandard errors. This specification explains nearly
60 percent of the variation in bilateral trade
flows. Our estimates show that monetary regimes may have had a nonnegligible impact on
internationaltrade. Otherexplanatoryvariables
seem in line with our predictions although in
some instances they are statistically insignificant. Annual cross-section regression results
also appearin Table 2. The limited size of our
annualsamples for some years resultedin poor
regression results in terms of statistical significance on our monetaryvariables,but, in qualitative terms, annualpoint estimates supportour
conclusions from the pooled regression.
A. Monetary Variables
Ourbaseline regressionrejectsthe hypothesis
that regime coordination had an insignificant
association with bilateraltradeflows. The coefficienton "gold,""silver,"and "monetaryunion"
are positive and statistically significant. Our
baseline results show that two countries on the
gold standardtraded62 percent more with one
another than with countries under a different
monetary regime. Trade between countries on
silver may have received an even bigger boost
from the common monetaryregime of approximately 115 percent.But the numberof pairs in
which "silver"is equal to 1 is small, and these
observations tend to appear at early stages of
our period of analysis. Bimetallism does not
seem to be a significant force encouragingbilateral trade flows either because of the small
numberof observationsor because of its inherent instability.
Countriesin a monetaryunion appearto trade
more than two times more with each other than
they would with countries outside the union.
Furthermore,the association between tradeand
a monetaryunion is likely understatedby look-
longer specifications are available in our longer working
paper version of this paper.
MARCH2003
ing at the coefficients on that variable.Joining a
monetaryunion effectively implied being on the
same commodityregime standard.For example,
in our baseline sample96 out of 118 pairswhich
sharea currencyare also on the gold standard.It
is reasonableto assertthat bilateraltradewould
be about 3.30 times larger when both countries
belonged to a monetaryunion.5
Nominal exchange-rate volatility is positively associatedwith internationaltrade,with a
statisticallysignificant coefficient of 0.17. This
finding contradictsour expectations of a negative effect and is in contrast to Jeffrey A.
Frankel and Shang-JinWei (1998) and Rose's
(2000) findings. In our defense, Philippe Bacchetta and Eric van Wincoop (2000) show
that the theoretical effect of exchange-rate
volatility on commerce is ambiguous, historical actors seem not to have paid too much
attention to such oscillations and most modern researchers like Maurice Obstfeld (1997)
and Charles Wyplosz (1997) have all but discounted the intuitive negative effect of volatility on trade.6
B. GravityEquation and Control Variables
The estimated coefficient on the product of
the country-pair'sGDP is 0.86. A literalreading
of our estimate suggests that trade openness
duringthe nineteenthcenturywas affected to a
lesser extent than today by the size of a country
and that commercial integrationhad reached a
level at least as high as today's level. Our estimate for the productof GDP per capita, 0.66, is
identical to that in Frankeland Rose (2002). In
our regression, a 1-percentincrease in the distance between two countries reduces bilateral
5 We consideredCanadato be in a
monetaryunion with
the United Kingdom and some of the British colonies and
dominions, as well as with the United States. This is because both British sovereigns and the U.S. dollarwere legal
tender in Canada. Our econometric results are identical
whetheror not we considerCanadaand the United States as
having a currencyunion.
6 In the
longer working paperwe devote an appendixto
this finding.Unexpectedlylarge tradein Brazil and Chiledespite high exchange-rate volatility in both countriesmay explain the positive coefficient. We also found a
quadraticrelationshipbetween exchange-ratevolatility and
trade.This suggests that at high levels of volatility (e.g., in
the aftermathof crises and/orrapiddepreciations),tradecan
be spurredwhile in normal times volatility reduces trade.
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VOL.93 NO. 1 L6PEZ-C6RDOVAAND MEISSNER:GLOBALTRADEAND THE GOLD STANDARD
trade by only 0.66 percent-compared to a
1-percentdecline in the late twentieth century,
according to Frankel and Rose (2002).7 The
distance coefficients may be capturing differences in the degree of relative trade openness
that existed in each period.
Estimateson the rest of our explanatoryvariables have the expected sign, although we did
not find statistically significant coefficients for
the common language and MFN dummies. If
product differentiation during the nineteenth
century were limited, then cultural similarities
captured in the common language dummy
would have been a less importantdeterminant
of trade, explaining the lack of significance of
the former variable. We attributethe statistically insignificantestimate of the MFN dummy
to the dearthof easily accessible sourcesregarding nineteenth-centurytradetreaties. Both contiguity and close political ties between two
countries (or colonies) are highly correlated
with trade.
C. Other Specifications
The main results are surprisinggiven thatour
data has overcome the theoretical observation
that large countrieswhich tradea lot should see
relatively small effects from droppingbilateral
barriers to trade (i.e., joining a monetary
union).8Nevertheless there are a host of factors
that might be influencing our results. We also
present a few alternative specifications of our
7 In our
working paper, we allow for a time-varying
distance coefficient and, as Jeff Williamson suggested, for a
more direct measure of transportationcosts. We also allowed for a bilateralmeasure of transportationcosts developed by Nuno Limao and Anthony J. Venables (1999)
which takes into account railroadsand telegraphiccommunications. This does not affect our qualitativeresults on the
monetaryvariables.
8 In a theoreticalanalysis of these issues, Rose and van
Wincoop (2001) and Anderson and van Wincoop (2003)
note that in situations where pre-union trade is low or
currencyunions are small, the effect of joining a union may
be large and, when tradeamong countriesis extensive or the
(potential)union is economically large, the effect of joining
a union would be small. The logic is that, if tradecosts are
reduced among a group of countries that already trade
substantiallywith each other, multilateraltradebarriersfall
considerably while bilateral resistance falls only slightly.
Trade increases the most when bilateral resistance falls
relatively more than multilateralresistance.
I
I
I
I
349
I
40 -
0D
c00
20 -
5)
c.
0 -
-20 5-9
10-14
15-19
20-24
25-29
30-34
35-39
Yearsaftermovingto coordinationon the gold standard
FIGURE 2. ESTIMATED LAGGED IMPACT ON TRADE OF A
MOVE TO COORDINATION
model to see if they validate the conclusions
from Table 2.
We illustratethe fact that it took a numberof
years to achieve the impact on trade that the
baseline regressions imply by allowing for
lagged effects of moves to coordinationin our
baseline pooled regression. That is we add to
our gravity equation indicator variables five
years, ten years, etc., aftera country-pairmoved
to coordination on the gold standard.9Figure
2 shows that trade between countries rises relative to noncoordinatingcountriesfor at least 30
years, reaching an impact of nearly 50 percent
after about 15 years. However, the few observations we have suggest that after 30 to 35
years, tradeis slightly lower comparedto countries that never moved to coordinationby 5 to
20 percent.
Next, we consider the possibility that unobserved country-pairor country characteristics
are driving our baseline results. Column (1) of
Table 3 presents a country-pair fixed-effects
specification of the gravity equation. Here coordinationon the gold standardstill has a positive and statistically significant association
with trade. Our estimate says that coordination
9 The effect we refer to in the
text is the sum of the
coordinationdummy (0.90 with a standarderrorof 0.14 in
this specification)plus the coefficient on the move to coordination t years later. The coefficients and their standard
errorsbeginning with that on five years after the move and
finishing 35 years after are -0.85 (0.14), -0.78 (0.18),
-0.49 (0.21), -0.49 (0.23), -0.65 (0.22), -0.96 (0.19),
and -1.13 (0.34).
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350
THEAMERICANECONOMICREVIEW
TABLE 3-HETEROGENEITY
Regressors
Gold
Silver
Bimetallism
Monetaryunion
Volatility
GDP
GDP per capita
Distance X cost index
AND ENDOGENEITY REGRESSIONS
(1)
Country-pairFE
(2)
CountryFE
(3)
IV regression
0.154
(0.077)
0.177
(0.267)
0.189
(0.312)
0.258
(0.54)
0.017
(0.024)
0.550
(0.148)
0.312
(0.092)
-0.33
(0.121)
0.283
(0.125)
1.104
(0.396)
-0.308
(0.352)
1.335
(0.389)
0.054
(0.034)
0.360
(0.265)
0.434
(0.113)
-
0.973
(1.318)
0.155
(0.690)
-0.031
(0.105)
yes
no
-9.530
(3.290)
-0.74
(0.103)
0.27
(0.389)
0.215
(1.137)
0.067
(0.223)
no
no
-21.264
(6.210)
1140
0.502
1140
0.735
681
0.670
Border
MFN
Country-paircontrols
Countrycontrols
Constant
Number of observations
R2
1.305
(1.358)
0.110
(0.369)
0.905
(0.091)
0.806
(0.519)
-0.487
(0.136)
0.567
(0.298)
0.906
(0.533)
-0.160
(0.133)
no
yes
-7.43
(6.584)
Distance
Political union
MARCH2003
Notes: Robust standarderrorsare reported.Year dummies are not reported.
IV regression-Variable instrumentedfor: gold and monetaryunion.
Instruments:Ratio of gold reserves to domestic liabilities outstanding and common
language indicator.
specific to each country as theoretical discussions of gravity models suggest (see Anderson
and van Wincoop, 2003). Country-pairson a
gold standardtrade about 30 percentmore with
each other while countries in a currencyunion
trade nearly 2.8 times more than they might if
not in a currency union, and both coefficients
are statisticallysignificant.
One could also arguethatan endogeneitybias
may be affecting our results. Countries that
traded disproportionatelymay have found it
more lucrative to coordinateon the gold standard or to form a currencyunion.11In order to
address this concern, we estimate our model
using instrumentalvariables.We instrumentfor
the gold standarddummy with the product of
each country's ratio of gold reserves to bank
10In our data there are 79 moves to coordination on
commodity money regimes while there are only two observations that involve a currencyunion regime switch.
"1We focus on the
gold standardbecause most of our
observationsare for gold standardcountries.
on the gold standardraises trade by 15 percent
relative to the country-pairsample average.10
The coefficient on the monetaryunion indicator
shrinksin magnitude.It is no longer statistically
significant,possibly because there is little variation in this regressorover time. Reassuringly,
the point estimate is still positive. Regression 2
uses country-specificfixed effects. This controls
for unobserved multilateral barriers to trade
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VOL.93 NO. 1 L6PEZ-C6RDOVA AND MEISSNER:GLOBALTRADEAND THE GOLD STANDARD
notes in circulation.A countrynecessarily possessed gold reserves to be on the gold standard.
However, it is unlikely thatthis gold cover ratio
would be affected by the level of integration
between countries. Moreover, the ratio may be
reflecting fundamentalfinancial capabilities or
exogenous legal stipulations on the level of
requiredreserves ratherthan unaccountabledeterminantsof trade.We instrumentfor the monetary union variable with a common language
indicator. Countries in our sample that had
monetary unions often shared a similar language. Yet we find no reason why language
might be correlated with the error term especially since we are controlling for so many
factors alreadyand explainingnearly 60 percent
of the variationin trade, because of our earlier
argumentthat products may not have been too
differentiated in the nineteenth century, and
since the common language dummy never enters our earlier specification with a statistically
significant coefficient.12Using two-stage least
squares, the magnitude of both point estimates
increases but neither coefficient is statistically
significant (Table 3, regression 3). However, a
Hausmantest cannot reject the null hypothesis
of exogeneity of the regressors (X2 = 0.07,
p-value 1.00). Therefore,we find no conclusive
evidence that an endogeneity bias explains our
baseline parameterestimates.
In our working paper we ran a number of
other checks. We allowed for the possibility of
a sample selection bias using a Heckman twostage estimator and we found that the coefficients on the monetary variables of interest
increased in magnitude and were still highly
statisticallysignificant.We also estimateda Tobit model to account for the potential sample
selection and obtainedresults similarto those in
the baseline regression. Moreover, we explored
whether other variables we omitted from the
baseline were biasing our coefficients or if the
endogeneity of GDP was an issue. Last, we
tested for the influence of outliers and corrected
for autocorrelationin the errorterm.The results
351
from our baseline specificationare quite robust
to potential specification problems. Virtually
none of the checks we undertookin this subsection radically altered the qualitativeconclusions of our basic model: monetaryregimes are
significantly associated with higher trade.
IV. ConcludingRemarks
In thispaperwe findstrongevidenceconsistent
with the idea that monetaryregime choice had a
largeimpacton patternsof tradein the firstperiod
of globalization.Trade flows may have been
nearly 30 percent larger when two countries
adoptedthe gold standard.Some evidence suggests that monetaryunions are associated with
levels of tradenearlytwo times higher.Combining these two effects, which was the case more
often than not, suggests a very large association
betweentradeand monetaryregimecoordination.
With these results it is also possible to gauge
the contributionof the gold standardto global
integrationbefore 1913. How might trade have
evolved without the rise of the classical gold
standard(i.e., no regime switching having occurredafter 1870) or with no commoditymoney
regime coordination?13 First we predictedtrade
in such a counterfactualworld using our baseline point estimates. We then comparedit to the
level of predictedtradegiven actualcommodity
regime adherence.This reveals that the rise of
the classical gold standardaccounts for perhaps
20 percent of the rise in global trade between
1880 and 1910. If each countryhad operatedits
own fiat money throughout the period, trade
might have been even slightly lower than this
figure.All of this stronglysupportsthe idea that
commodity money regime coordination and
currencyunions were an importantcatalyst for
nineteenth-centuryglobalization.
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The coefficients and their standarderrorsin parentheses in first-stagelinear regressions predictinggold standard
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