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Gold, Fiat Money, and Price Stability

  • Bordo Michael D.

    ()

    (Rutgers University)

  • Dittmar Robert D

    ()

    (Risk Analytics)

  • Gavin William T.

    ()

    (Federal Reserve Bank of St. Louis)

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.

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Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 7 (2007)
Issue (Month): 1 (August)
Pages: 1-31

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Handle: RePEc:bpj:bejmac:v:7:y:2007:i:1:n:26
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  2. Fujiki, Hiroshi, 2003. "A model of the Federal Reserve Act under the international gold standard system," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1333-1350, September.
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