Realignment expectations and the US dollar, 1890–1897: Was there a ‘Peso problem’?

Uncovered Interest Rate Parity over the Past Two Centuries

“…When these fears proved unfounded, US interest rates fell and, as it turned out, proved too low given the somewhat higher US than UK inflation over the next decade and a half. See the discussions of this episode in Schwartz (1963, 1982) and the subsequent econometric analysis of Hallwood, MacDonald, and Marsh (2000).…”

“…Hallwood, MacDonald, and Marsh (2000) and Lewis (1988) argue how the peso problem in a short sample can dramatically alter the results on expectation-hypothesis regressions. The literature has proposed statistical methods to correct for small-sample bias (Bekaert, Hodrick, and Marshall (1997)), but the ultimate remedy for the peso problem is to use an ultra-long sample.…”

Reflections on Milton Friedman's contributions to open economy money/macro

“…Only in 1900 was the Gold Standard Act passed, which placed the US firmly on a gold standard for the indefinite future. Hallwood et al (2000) have noted that interest rates in the States were two percent per annum higher than equivalent interest rates in the UK during the period 1890-1896. Once it became clear, in 1896, that the US would remain on the gold standard, the premium built into US interest rates fell to one percent.…”

International Money and Finance

“…As an example of the application of the Mizrach (1995) model, Hallwood, MacDonald andMarsh (2000b) apply it to the USA during the period 1890-1908 when, for part of this period, American continued adherence to the gold standard was in doubt. We use two dummies to capture the effects on the probability of realignment of, first, the Silver Purchase Act, 1890-1893 (which partly untied the US money base from gold) and, secondly, political pressure for a return to a bimetallic silvergold standard which lasted from at least 1890 until the defeat of the silver candidate in the presidential election of November 1896.…”