Gold, Fiat Money, and Price Stability
Which monetary regime is associated with the most stable price level? A commodity money regime such as the classical gold standard has long been associated with long-run price stability. But critics of the day argued that the regime was associated with too much short-run price variability and argued for reforms that look much like modern versions of price-level targeting. In this paper, we develop a dynamic stochastic general equilibrium model that we use to examine price dynamics under four alternative regimes. They are the gold standard, Irving Fisher's compensated dollar proposal, and two regimes with paper money in which the central bank uses an interest rate rule to run monetary policy. In the first, the central bank uses an interest rate rule to target the price of gold. In the second, there is no convertibility and the central bank targets uses an interest rate rule to target an inflation rate. We find that strict inflation targeting, even though it introduces a unit root into the price level, provides more short-run stability than the gold standard and as much long-term price stability as does the gold standard for horizons shorter than 30 years. We find that Fisher's compensated dollar reduces price level and inflation uncertainty by an order of magnitude at all horizons.
|Date of creation:||Dec 2003|
|Date of revision:|
|Publication status:||published as Bordo, Michael D., Robert D. Dittmar, and William T. Gavin. "Gold, Fiat Money, and Price Stability." B.E. Journal of Macroeconomics: Topics in Macroeconomics 7, 1 (2007).|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Robert Dittmar & William T. Gavin & Finn E. Kydland, 1999. "Price-level uncertainty and inflation targeting," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 23-34.
- Jeremy Atack & Fred Bateman, 1990.
"How Long Was the Workday in 1880?,"
NBER Historical Working Papers
0015, National Bureau of Economic Research, Inc.
- Robert Dittmar & William T. Gavin, 2004.
"Inflation-targeting, price-path targeting and indeterminacy,"
2004-007, Federal Reserve Bank of St. Louis.
- Dittmar, Robert D. & Gavin, William T., 2005. "Inflation-targeting, price-path targeting and indeterminacy," Economics Letters, Elsevier, vol. 88(3), pages 336-342, September.
- King, Robert G & Watson, Mark W, 1998. "The Solution of Singular Linear Difference Systems under Rational Expectations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 1015-26, November.
- Bennett T. McCallum, 1997.
"Issues in the Design of Monetary Policy Rules,"
NBER Working Papers
6016, National Bureau of Economic Research, Inc.
- Sargent, Thomas J. & Wallace, Meil, 1983.
"A model of commodity money,"
Journal of Monetary Economics,
Elsevier, vol. 12(1), pages 163-187.
- 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.
- Allan Meltzer & Saranna Robinson, 1989. "Stability Under the Gold Standard in Practice," NBER Chapters, in: Money, History, and International Finance: Essays in Honor of Anna J. Schwartz, pages 163-202 National Bureau of Economic Research, Inc.
- Milton Friedman, 1951. "Commodity-Reserve Currency," Journal of Political Economy, University of Chicago Press, vol. 59, pages 203.
- Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1989.
"Building Blocks of Market Clearing Business Cycle Models,"
in: NBER Macroeconomics Annual 1989, Volume 4, pages 247-302
National Bureau of Economic Research, Inc.
- Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1989. "Building Blocks of Market Clearing Business Cycle Models," NBER Working Papers 3004, National Bureau of Economic Research, Inc.
- Christopher J. Erceg & Andrew T. Levin, 2001.
"Imperfect credibility and inflation persistence,"
Finance and Economics Discussion Series
2001-45, Board of Governors of the Federal Reserve System (U.S.).
- Neely, Christopher J & Roy, Amlan & Whiteman, Charles H, 2001. "Risk Aversion versus Intertemporal Substitution: A Case Study of Identification Failure in the Intertemporal Consumption Capital Asset Pricing Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(4), pages 395-403, October.
- Bordo, Michael D. & Jonung, Lars, 2000. "A Return to the Convertibility Principle? Monetary And Fiscal Regimes in Historical Perspective," SSE/EFI Working Paper Series in Economics and Finance 415, Stockholm School of Economics.
- Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:10171. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.