Stuck on Gold: Real Exchange Rate Volatility and the Rise and Fall of the Gold Standard, 1870-1939

40 Pages Posted: 11 Apr 2006

See all articles by Alan M. Taylor

Alan M. Taylor

University of California, Davis - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Natalia Chernyshoff

affiliation not provided to SSRN

David S. Jacks

National University of Singapore (NUS), Department of Economics

Date Written: January 2006

Abstract

Did adoption of the gold standard exacerbate or diminish macroeconomic volatility? Supporters thought so, critics thought not, and theory offers ambiguous messages. A hard exchange-rate regime such as the gold standard might limit monetary shocks if it ties the hands of policy-makers. But any decision to forsake exchange-rate flexibility might compromise shock absorption in a world of real shocks and nominal stickiness. A simple model shows how a lack of flexibility can be discerned in the transmission of terms of trade shocks. Evidence on the relationship between real exchange rate volatility and terms of trade volatility from the late nineteenth and early twentieth century exposes a dramatic change. The classical gold standard did absorb shocks, but the interwar gold standard did not, and this historical pattern suggests that the interwar gold standard was a poor regime choice.

Keywords: Gold standard

JEL Classification: F33, F41, N10

Suggested Citation

Taylor, Alan M. and Chernyshoff, Natalia and Jacks, David S., Stuck on Gold: Real Exchange Rate Volatility and the Rise and Fall of the Gold Standard, 1870-1939 (January 2006). CEPR Discussion Paper No. 5430, Available at SSRN: https://ssrn.com/abstract=896238

Alan M. Taylor (Contact Author)

University of California, Davis - Department of Economics ( email )

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HOME PAGE: http://www.econ.ucdavis.edu/faculty/amtaylor/

National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

London
United Kingdom

HOME PAGE: http://cepr.org

Natalia Chernyshoff

affiliation not provided to SSRN ( email )

No Address Available

David S. Jacks

National University of Singapore (NUS), Department of Economics ( email )

Singapore
Singapore

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