Which monetary regime is associated with the most stable price level? A commodity money regime such as the classical gold standard has long been associated with long-run price stability. But critics of the day argued that the regime was associated with too much short-run price variability and argued for reforms that look much like modern versions of price-level targeting. In this paper, we develop a dynamic stochastic general equilibrium model that we use to examine price dynamics under four alternative regimes. They are the gold standard, Irving Fisher's compensated dollar proposal, and two regimes with paper money in which the central bank uses an interest rate rule to run monetary policy. In the first, the central bank uses an interest rate rule to target the price of gold. In the second, there is no convertibility and the central bank targets uses an interest rate rule to target an inflation rate. We find that strict inflation targeting, even though it introduces a unit root into the price level, provides more short-run stability than the gold standard and as much long-term price stability as does the gold standard for horizons shorter than 30 years. We find that Fisher's compensated dollar reduces price level and inflation uncertainty by an order of magnitude at all horizons.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
10171.
Length: Date of creation: Dec 2003 Date of revision: Handle: RePEc:nbr:nberwo:10171
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Find related papers by JEL classification: E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Allan Meltzer & Saranna Robinson, 1989.
"Stability Under the Gold Standard in Practice,"
NBER Chapters,
in: Money, History, and International Finance: Essays in Honor of Anna J. Schwartz, pages 163-202
National Bureau of Economic Research, Inc.
[Downloadable!]
Thomas J. Sargent & Neil Wallace, 1983.
"A model of commodity money,"
Staff Report
85, Federal Reserve Bank of Minneapolis.
[Downloadable!]
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