The effects of countercyclical interest rates: Evidence from the classical gold standard
Kris J. Mitchener and Gonçalo Pina
Abstract
We estimate the impact of countercyclical interest rates on macroeconomic outcomes in open economies. To identify countercyclical interest rates, we construct a new database of short-term interest rates, principal exports, and commodity prices for 40 economies from 1870–1913. Specialization and trade integration subjected economies to a “commodity lottery” in the form of price fluctuations in world markets. Capital mobility and a currency peg exposed them to interest-rate movements originating in the U.K., the largest economy and linchpin of the classical gold standard. We use these two exogenous shocks to identify positive effects of commodity-export prices on real GDP and the domestic price level and negative effects of exogenous changes in short-term interest rates on the same variables. We show that countercyclical interest rates, defined relative to export-price shocks, stabilized both output and the domestic price level. This stabilization was more effective for the price level than for output.