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A model of bimetallism

  • François R. Velde
  • Warren E. Weber

Bimetallism has been the subject of considerable debate: Was it a viable monetary system? Was it a desirable system? In our model, the (exogenous and stochastic) amount of each metal can be split between monetary uses to satisfy a cash-in-advance constraint, and nonmonetary uses in which the stock of uncoined metal yields utility. The ratio of the monies in the cash-in-advance constraint is endogenous. Bimetallism is feasible: we find a continuum of steady states (in the certainty case) indexed by the constant exchange rate of the monies; we also prove existence for a range of fixed exchange rates in the stochastic version. Bimetallism does not appear desirable on a welfare basis: among steady states, we prove that welfare under monometallism is higher than under any bimetallic equilibrium. We compute welfare and the variance of the price level under a variety of regimes (bimetallism, monometallism with and without trade money) and find that bimetallism can significantly stabilize the price level, depending on the covariance between the shocks to the supplies of metals.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Working Papers with number 588.

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Date of creation: 1998
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Publication status: Published in Journal of Political Economy (Vol. 108, No. 6, December 2000, pp. 1210-1234)
Handle: RePEc:fip:fedmwp:588
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  1. Angela Redish, 1995. "The persistence of bimetallism in nineteenth-century France," Economic History Review, Economic History Society, vol. 48(4), pages 717-736, November.
  2. Dowd, Kevin, 1996. "The Analytics of Bimetallism," The Manchester School of Economic & Social Studies, University of Manchester, vol. 64(3), pages 281-97, September.
  3. Garber, Peter M, 1986. "Nominal Contracts in a Bimetallic Standard," American Economic Review, American Economic Association, vol. 76(5), pages 1012-30, December.
  4. Chau-nan Chen, 1972. "Bimetallism: Theory and Controversy in Perspective," History of Political Economy, Duke University Press, vol. 4(1), pages 89-112, Spring.
  5. Kareken, John & Wallace, Neil, 1981. "On the Indeterminacy of Equilibrium Exchange Rates," The Quarterly Journal of Economics, MIT Press, vol. 96(2), pages 207-22, May.
  6. Oppers, Stefan Erik, 1996. "Was the worldwide shift to gold inevitable? An analysis of the end of bimetallism," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 143-162, February.
  7. Flandreau, Marc, 1995. "An Essay on the Emergence of the International Gold Standard, 1870-80," CEPR Discussion Papers 1210, C.E.P.R. Discussion Papers.
  8. Oppers, S.E., 1993. "A Model of the Bimetallic System," Working Papers 332, Research Seminar in International Economics, University of Michigan.
  9. C. C. Patterson, 1972. "Silver Stocks and Losses in Ancient and Medieval Times," Economic History Review, Economic History Society, vol. 25(2), pages 205-233, 05.
  10. Sargent, Thomas J & Velde, Francois R, 1999. "The Big Problem of Small Change," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(2), pages 137-61, May.
  11. Sargent, Thomas J. & Wallace, Meil, 1983. "A model of commodity money," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 163-187.
  12. Friedman, Milton, 1990. "The Crime of 1873," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1159-94, December.
  13. Redish, Angela, 1990. "The Evolution of the Gold Standard in England," The Journal of Economic History, Cambridge University Press, vol. 50(04), pages 789-805, December.
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