Citation:
 | Download PDF | 351 KB |
Abstract:
This paper reassesses the importance of colonial status to investors before 1914 by means of multivariable regression analysis of the data available to contemporaries. We show that British colonies were able to borrow in London at significantly lower rates of interest than non–colonies precisely because of their colonial status, which mattered more than either the convertibility of their currencies into gold or the sustainability of their fiscal policies. Allowing for differences not only in monetary and fiscal policy but also in economic development and location, the Empire effect was, on average, a discount of around 100 basis points, rising to around 175 basis points for the underdeveloped African and Asian colonies. We conclude that colonial status significantly reduced the default risk perceived by investors.