publication

Gold and trade an empirical simulation approach

Authors:
Rui Pedro ESTEVES
Florian PLOECKL
2018

The network externalities from international trade to the choice of exchange rate regimes have been invoked to explain the rise of the classical gold standard. In particular, gravity regressions have consistently shown large trade gains for countries on the same monetary regime (especially gold). However, causality probably runs in both directions, since more open economies would have a greater incentive to adopt stable exchange rate regimes, especially if they traded more with other countries already on gold. This raises an endogeneity issue for which conventional identification methods are not suitable. This paper uses empirical network analysis to model the co-evolution of trade and exchange rate regimes. Preliminary results suggest that the network externalities from trade were indeed strong and conditioned the choice of monetary regimes. The monetary regime of trade partners also influenced the configuration of each country's trade network. However, common monetary standards per se did not increase the likelihood that two countries traded, contrary to the existing estimates in the literature.