Core, Periphery, Exchange Rate Regimes, and Globalization

Abstract

Abstract The traditional view is that fixed exchange rate regimes are best for the globalization of financial markets. This view is based on the stellar performance of the classical gold standard. Yet today we are in another era of globalization as pervasive as the earlier one, and the dominant regime is floating. This paradox suggests at first glance that globalization, rather than being determined by the exchange rate regime, occurs independent of the exchange rate regime. However, although this may be the case for advanced countries, it is not for emergers, whose regime choice is in large measure driven by international financial integration. This chapter focuses on the different historical regime experiences of the core and the periphery. Section 9.2 sets the stage by considering the evidence on global financial integration from 1880 to 1997, using the well-known Feldstein–Horioka approach. Section 9.3 lays out the financial maturity hypothesis and presents narrative evidence for the pre-1914 period of the different experiences of the core and peripheral countries in adhering to the gold standard. Section 9.4 presents some empirical evidence on the link between financial depth and the exchange rate regime for core (advanced) and peripheral (emerging) countries from 1880–1913 and today. Section 9.5 summarizes the findings and suggests some lessons from history. A commentary is also included at the end of the chapter.