Core, Periphery, Exchange Rate Regimes, and Globalization

In this paper we focus on the different historical regime experiences of the core and the periphery. Before 1914 advanced countries adhered to gold while periphery countries either emulated the advanced countries or floated. Some peripheral countries were especially vulnerable to financial crises and debt default in large part because of their extensive external debt obligations denominated in core country currencies. This left them with the difficult choice of floating but restricting external borrowing or devoting considerable resources to maintaining an extra hard peg. Today while advanced countries can successfully float, emergers who are less financially mature and must borrow abroad in terms of advanced country currencies, are afraid to float for the same reason as their nineteenth century forbearers. To obtain access to foreign capital they may need a hard peg to the core country currencies. Thus the key distinction between core and periphery countries both then and now^that we emphasize in this paper is financial maturity, evidenced in the ability to issue international securities denominated in domestic currency. Evidence in Section 2 from Feldstein-Horioka tests 1880-1997