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A Viable Gold Standard Requires Flexible Monetary And Fiscal Policy

This paper studies an idealized gold standard in a two-country setting. Without flexible national domestic credit expansion policies, the standard collapses in finite time through a speculative attack against one of the currencies. When a responsive domestic credit expansion policy eliminates the danger of a run on a country's reserves, the shocks disturbing the system, which previously were reflected in reserve flows, now show up in the public debt. Unless the primary government deficit is permitted to respond, the debt is likely to rise (or fall) to unsustainable levels. Viability can be achieved only through the active use of monetary and fiscal policy. Copyright 1989 by The Review of Economic Studies Limited.

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Paper provided by London School of Economics - Centre for Labour Economics in its series Papers with number 306.

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Length: 33 pages
Date of creation: 1988
Date of revision:
Handle: RePEc:fth:lseple:306
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