Gold-Point Arbitrage and Uncovered Interest Arbitrage under the 1925-1931 Dollar-Sterling Gold Standard |
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| Affiliation: | 1. Department of Economics, Monash University, Australia;2. Department of Economics and Management, University of Padova, Italy;3. Melbourne Institute of Applied Economic and Social Research and Department of Economics, University of Melbourne, Australia;4. BETA-CNRS and CAC - IXXI, Complex Systems Institute, France;5. Sciences Po Lyon LAET - CNRS and CAC - IXXI, Complex Systems Institute, France;6. Department of Economics, University of Verona, Italy |
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| Abstract: | Efficient gold-point arbitrage confines the exchange rate to the gold-point spread, but efficient uncovered interest arbitrage stabilizes the exchange rate even more, locating it within a narrower "speculation band." Under the 1925-1931 dollar-sterling gold standard, gold-point arbitrage was uniformly efficient, but uncovered interest arbitrage exhibited periodic episodes of apparent inefficiency, susceptible to various explanations. Gold-point arbitrage and uncovered interest arbitrage reinforce each other′s efficiency, thereby enhancing exchange-rate stability. In fact, the dollar-sterling exchange rate during the interwar gold standard was considerably more stable than that in the classical period. |
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