Gold and Trade: An empirical simulation approach
The network externalities from international trade to the choice of exchange rate regimes have been invoked to explain the rise of the classical gold standard. In particular, gravity regressions have consistently shown large trade gains for countries on the same monetary regime (especially gold). However, causality probably runs in both directions, since more open economies would have a greater incentive to adopt stable exchange rate regimes, especially if they traded more with other countries already on gold. This raises an endogeneity issue for which conventional identification methods are not suitable. This paper uses empirical network analysis to model the co-evolution of trade and exchange rate regimes. Simulations of this evolution indicate the presence of a selection effect, monetary regimes influenced trade on the intensive though not extensive margin, and a contagion effect, the monetary regimes of trade partners shaped countries' decisions to change their regime, during the First Globalization and classical gold standard era.