Gold, Fiat Money and Price Stability
Michael D. Bordo
Harvard University - Department of Economics; National Bureau of Economic Research (NBER)
Citigroup, Inc. - CitiMortgage
William T. Gavin
Federal Reserve Bank of St. Louis - Research Division
FRB of St. Louis Working Paper No. 2003-014D
The classical gold standard has long been associated with long-run price stability. But short-run price variability led critics of the gold standard to propose reforms that look much like modern versions of price path targeting. This paper uses a dynamic stochastic general equilibrium model to examine price dynamics under alternative policy regimes. In the model, a pure inflation target provides more short-run price stability than does the gold standard and, although it introduces a unit root into the price level, it leads to as much long-term price stability as does the gold standard for horizons shorter than 20 years. Relative to these regimes, Fisher's compensated dollar (or pure price path targeting) reduces inflation uncertainty by an order of magnitude at all horizons. A Taylor rule with its relatively large weight on output leads to large uncertainty about inflation at long horizons. This long-run inflation uncertainty can be largely eliminated by introducing an additional response to the deviation of the price level from a desired path.
Number of Pages in PDF File: 31
Keywords: Gold standard, compensated dollar, inflation targeting
JEL Classification: E31, E42, E52working papers series
Date posted: April 20, 2006
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo7 in 0.610 seconds