Taming the Global Financial Cycle: Central Banks as Shock Absorbers in the First Era of Globalization

The Classical Gold Standard period, with high capital mobility and fixed-exchange rates, is usually seen as the extreme case of international constraints on monetary policy. Contrary to this view, we show how central bank balance sheets offset the effects of international shocks on domestic interest rates. In contrast, in the United States, a gold standard country without a central bank, the reaction of money market rates was two to four times stronger than that of interest rates in countries with a central bank. Our study is based on the monthly balance sheets of all central banks in the world (i.e., 21) from 1891–1913.