16 - Net outcome

Summary

Methodology of measuring regime efficiency

Determinants of regime efficiency

The efficiency bands of the various operations – gold-point arbitrage, uncovered interest arbitrage, covered interest arbitrage, and joint “forward speculation with covered interest arbitrage” – the extent to which the operations are efficient (within the respective bands), and the influences of the various market and policy variables combine with the determinants of external and internal integration to generate a certain level of regime efficiency. So interest now extends beyond 1925–31 to 1791–1931, 1950–66 – the entire time span of the study. What is the appropriate measure of the extent of regime efficiency?

A simple measure of efficiency

Perfect regime efficiency is defined as the exchange rate at the mid-point of the gold-point spread. At this point it is convenient to revert to expressing the exchange rate in percentage points of parity and as the deviation from the spread mid-point: R^* as developed in section 1 of chapter 11. So perfect regime efficiency is given by R^* = 0. A simple measure of the amount of regime inefficiency is then |R^*|. This is the experienced (observed) deviation of the exchange rate from the spread mid-point. For a given period of time with a time series of |R^*|, the average of the deviations may be taken; so the measure of inefficiency becomes mean |R^*|.