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Stuck on Gold:Real Exchange Rate Volatility and the Rise and Fall of the Gold Standard, 1870–1939

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Author Info

  • Alan M. Taylor
  • Natalia Chernyshoff
  • David Jacks

    (Department of Economics, University of California Davis)

Abstract

Did adoption of the gold standard exacerbate or diminish macroeconomic volatility? Supporters thought so, critics thought not, and theory offers ambiguous messages. A hard exchange-rate regime such as the gold standard might limit monetary shocks if it ties the hands of policy makers. But any decision to forsake exchange-rate flexibility might compromise shock absorption in a world of real shocks and nominal stickiness. A simple model shows how a lack of flexibility can be discerned in the transmission of terms of trade shocks. Evidence on the relationship between real exchange rate volatility and terms of trade volatility from the late nineteenth and early twentieth century exposes a dramatic change. The classical gold standard did absorb shocks, but the interwar gold standard did not, and this historical pattern suggests that the interwar gold standard was a poor regime choice.

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Bibliographic Info

Paper provided by University of California, Davis, Department of Economics in its series Working Papers with number 67.

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Length: 37
Date of creation: 01 Nov 2005
Date of revision:
Handle: RePEc:cda:wpaper:06-7

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Keywords: gold standard; exchange rate;

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Cited by:
  1. NAKABAYASHI, Masaki, 2008. "Imposed Efficiency of Treaty Port: Japanese Industrialization and Western Imperialist Institutions," ISS Discussion Paper Series (series F) f142, Institute of Social Science, The University of Tokyo, revised 07 Dec 2013.
  2. Lin, Justin Yifu & Fardoust, Shahrokh & Rosenblatt, David, 2012. "Reform of the international monetary system : a jagged history and uncertain prospects," Policy Research Working Paper Series 6070, The World Bank.

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