The resurgence in global trade and capital flows over the past three decades has important implications for the growth trajectories of developing countries. The widespread incidence of financial crises and sovereign debt default over this period has led some policymakers to call for a reform of the global financial architecture that buttresses these factor flows. Drawing on data from an earlier era of economic integration, this project aims to enhance our understanding of the role that institutions play in facilitating trade and capital flows by examining the relationship between debt default, trade, and the classical gold standard from 1870-1913.
This project applies new data sets and rigorous empirical research methods to test several hypotheses that are central to research in international trade and finance, and economic history. Drawing on earlier work of the investigators, part one of the project tests whether sanctions have been used to enforce sovereign debt repayment. It aims to broaden the empirical literature on sanctions by examining an earlier era of sovereign default (1870-1913), and by testing a broader range of sanctions than what has been studied for modern debt crises. An augmented gravity model of trade is used to test whether trade sanctions or "supersanctions" - instances where external military pressure or political control was imposed on defaulting nations - were effective ways of enforcing sovereign debt repayment from 1870-1913. Since previous research by economists has not attempted to quantify the effects of direct intervention, this project will also test whether ex ante and ex post default probabilities of bonds were affected by supersanctions.
The second component of the project examines the importance of institutions on trade flows. Using an expanded version of the trade database developed for the first study, this part quantifies whether membership in an empire or belonging to a currency union (in this case the gold standard) boosted bilateral trade from 1870-1913. The project aims to fill a void in the existing literature by testing the relative importance of these two channels on trade.
The third part of the project assembles a database of weekly bond prices for sovereign borrowers and examines whether financial market contagion took place during the Baring Crisis of 1890. Although previous research has recognized the impact of the Baring Crisis on the Argentine economy, relatively little research has been conducted on whether it spilled over to neighboring countries or other sovereign borrowers. The final component of the project uses the bond price database and event-study methodology to test whether country risk premia decreased in the months leading up to the adoption of the gold standard. Results from these time series tests will improve researchers' understanding of whether financial markets interpreted the adoption of the gold standard as a signal of a borrowing country's commitment to maintain prudent fiscal and monetary policy.
The four data-intensive pieces of this project will have broader impacts on research on financial crises and sovereign debt default and provide insights from history for policymakers. The project calls for assembling several new, large databases, which will have a broad impact on researchers' ability to study the gold standard era and carry out empirical tests for longer sample periods. The first two parts of the project will create more than 15,000 observations on bilateral trade from 1870-1913 - roughly twice the size of existing databases. The third and fourth projects create a database of approximately one million observations on weekly bond prices, and provide additional weekly data on exchange rates for a sample of Latin American countries during the classical gold standard era. The project will also construct bond indices for different samples of countries including core, emerging market, empire, and non-empire during the gold standard period. All series will be available for others to use and disseminated broadly through online networks and publications by the project investigators.
The serial nature of sovereign debt default over the last 150 years has raised awareness about the broader impact of debt default on long-run economic growth and on the stability of societies. Argentina's recent, sizable default has only underscored the importance of effective institutions for debt workouts. This project's findings will offer a historical lens for policymakers to assess whether sanctions or other third-party enforcement mechanisms are effective measures for enforcing debt repayment, and whether sovereign debt defaults are a source of contagion. It also provides insights as to whether there are benefits to trade from joining currency unions or political unions, and whether fixed-exchange-rate regimes encourage countries to pursue time-consistent policies
