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A Viable Gold Standard Requires Flexible Monetary 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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  • Willem H. Buiter, 1989. "A Viable Gold Standard Requires Flexible Monetary and Fiscal Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 56(1), pages 101-117.
    • Handle: RePEc:oup:restud:v:56:y:1989:i:1:p:101-117.
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    File URL: http://hdl.handle.net/10.2307/2297752
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    Cited by:

    1. Daniel, Betty C, 2001. "A Fiscal Theory of Currency Crises," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 969-988, November.
    2. Dumas, Bernard & Svensson, Lars E. O., 1994. "How long do unilateral target zones last?," Journal of International Economics, Elsevier, vol. 36(3-4), pages 467-481, May.
    3. Buiter, Willem H., 1995. "Macroeconomic Policy During a Transition to Monetary Union," CEPR Discussion Papers 1222, C.E.P.R. Discussion Papers.
    4. Buiter, Willem H. & Pesenti, Paolo A., 1990. "Rational Speculative Bubbles In An Exchange Rate Target Zone," Economic Research Papers 268490, University of Warwick - Department of Economics.
    5. Michael D. Bordo, 1993. "The gold standard, Bretton Woods and other monetary regimes: a historical appraisal," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 123-191.
    6. Michael D. Bordo & Barry Eichengreen, 1998. "The Rise and Fall of a Barbarous Relic: The Role of Gold in the International Monetary SYstem," NBER Working Papers 6436, National Bureau of Economic Research, Inc.

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