Interest rate risk premium and monetary union in lessons the european periphery: New lessons from the gold standard1

Abstract

This paper analyses time-variable risk premiums on long-term government securities during the classical gold standard period 1880–1914. I employ a quasi-capital asset pricing model (CAPM) for a cross-section of six countries which adhered to the gold standard to varying degrees. The empirical results show that systematic risk was higher and more variable for countries shadowing the gold standard. Peripheral countries benefited by participating in a monetary union as opposed to countries pursuing independent monetary policies. Long-term commitment to the gold standard was determinant of long-term government bond yields and contributed to long-term economic growth. An analysis of the international crisis of 1890 indicates that there was a ‘flight to quality’ during the crisis. Countries not on gold experienced a larger increase in risk, as well as a decline in long-run growth prospects. Finally, the results indicate an overall decrease in the volatility of systematic risk during the early 1900s. This can be interpreted as evidence of a ‘market-wide’ effect on the international monetary regime.