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Gold, Fiat Money, and Price Stability

Author

Listed:
  • Bordo Michael D.

    () (Rutgers University)

  • Dittmar Robert D

    () (Risk Analytics)

  • Gavin William T.

    () (Federal Reserve Bank of St. Louis)

Abstract

The classical gold standard has long been associated with long-run price stability. But short-run price variability led critics of the gold standard to propose reforms that look much like modern versions of price-path targeting. This paper uses a dynamic stochastic general equilibrium model to examine price dynamics under alternative policy regimes. In the model, a pure inflation target provides more short-run price stability than does the gold standard and, although it introduces a unit root into the price level, it leads to as much long-term price stability as does the gold standard for horizons shorter than 20 years. Relative to these regimes, Fisher's compensated dollar (or pure price-path targeting) reduces inflation uncertainty by an order of magnitude at all horizons. A Taylor rule, with its relatively large weight on output, leads to large uncertainty about inflation at long horizons. This long-run inflation uncertainty can be largely eliminated by introducing an additional response to the deviation of the price level from a desired path.

Suggested Citation

  • Bordo Michael D. & Dittmar Robert D & Gavin William T., 2007. "Gold, Fiat Money, and Price Stability," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-31, August.
  • Handle: RePEc:bpj:bejmac:v:7:y:2007:i:1:n:26
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Bordo, Michael D., 2012. "Could the United States have had a better central bank? An historical counterfactual speculation," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 597-607.
    2. Elisa Newby, 2007. "Macroeconomic Implications of Gold Reserve Policy of the Bank of England during the Eighteenth Century," CDMA Working Paper Series 200708, Centre for Dynamic Macroeconomic Analysis.
    3. Elisa Newby, 2007. "The Suspension of Cash Payments as a Monetary Regime," CDMA Working Paper Series 200707, Centre for Dynamic Macroeconomic Analysis.
    4. Newby, Elisa, 2012. "The suspension of the gold standard as sustainable monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 36(10), pages 1498-1519.
    5. Richard C.K. Burdekin & Kris James Mitchener & Marc D. Weidenmier, 2012. "Irving Fisher and Priceā€Level Targeting in Austria: Was Silver the Answer?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(4), pages 733-750, June.
    6. A. Malliaris & Mary Malliaris, 2013. "Are oil, gold and the euro inter-related? Time series and neural network analysis," Review of Quantitative Finance and Accounting, Springer, vol. 40(1), pages 1-14, January.
    7. Shafiee, Shahriar & Topal, Erkan, 2010. "An overview of global gold market and gold price forecasting," Resources Policy, Elsevier, vol. 35(3), pages 178-189, September.
    8. Bagus, Philipp & Gabriel, Amadeus & Howden, David, 2014. "Causes and Consequences of Inflation," MPRA Paper 79608, University Library of Munich, Germany.

    More about this item

    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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