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A "Gold Standard" Isn't Viable Unless Supported by Sufficiently FlexibleMonetary and Fiscal Policy

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  • Willem H. Buiter

Abstract

The paper studies an idealized gold standard in a two-country setting. Without flexible national domestic credit expansion (dce)policies which offset the effect of money demand shocks on international gold reserves, the gold standard collapses with certainty in finite time through a speculative selling attack against one of the currencies.Various policies for postponing a collapse are considered. When a responsive dce policy eliminates the danger of a run on a country's reserves, the exogenous shocks disturbing the system which previously were reflected in reserve flows, now show up in the behaviour of the public debt. Unless the primary (non-interest) government deficit is permitted to respond to these shocks, the public debt is likely to rise (or fall) to unsustainable levels. For the idealized gold standard analysed in the paper, viability can be achieved only through the active and flexible use of monetary and fiscal policy.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1903.

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Date of creation: Apr 1986
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Publication status: published as Buiter, Willem. "A Viable Gold Standard Requires Flexible Monetary And Fiscal Policy," from Review of Economic Studies, Vol. 56, pp. 101-117, (1989).
Handle: RePEc:nbr:nberwo:1903

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  1. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  2. Salant, Stephen W & Henderson, Dale W, 1978. "Market Anticipations of Government Policies and the Price of Gold," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(4), pages 627-48, August.
  3. Robert P. Flood & Peter M. Garber, 1982. "A model of stochastic process switching," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 201, Board of Governors of the Federal Reserve System (U.S.).
  4. Maurice Obstfeld, 1986. "Speculative Attack and the External Constraint in a Maximizing Model of the Balance of Payments," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 19(1), pages 1-22, February.
  5. Stephen W. Salant & Dale W. Henderson, 1976. "Market anticipations, government policy, and the price of gold," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 81, Board of Governors of the Federal Reserve System (U.S.).
  6. Buiter, Willem H, 1984. "Saddlepoint Problems in Continuous Time Rational Expectations Models: A General Method and Some Macroeconomic Examples," Econometrica, Econometric Society, Econometric Society, vol. 52(3), pages 665-80, May.
  7. Robert B. Barsky & Lawrence H. Summers, 1985. "Gibson's Paradox and the Gold Standard," NBER Working Papers 1680, National Bureau of Economic Research, Inc.
  8. Grilli, Vittorio U., 1986. "Buying and selling attacks on fixed exchange rate systems," Journal of International Economics, Elsevier, Elsevier, vol. 20(1-2), pages 143-156, February.
  9. Obstfeld, Maurice, 1984. "Balance-of-Payments Crises and Devaluation," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 16(2), pages 208-17, May.
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