The Suspension of Cash Payments as a Monetary Regime
By setting bounds on money growth, the commodity standard is a solution to the monetary authorityâ€™s time inconsistency problem, which arises from the fixed wage structure of the economy. If there is a supply shock to the backing commodity, the suspension of the commodity standard may be desirable in terms of stabilisation of production and consumption. By representing a credible commitment to return to the commodity standard, the suspension of cash payments maintains the value and circulation of money. Lessons and evidence are taken from Englandâ€™s experience of the suspension of cash payments between 1797 and 1821.
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