Stuck on Gold: Real Exchange Rate Volatility and the Rise and Fall of the Gold Standard, 1870-1939
40 Pages Posted: 11 Apr 2006
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: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Modern History of Exchange Rate Arrangements: A Reinterpretation
By Carmen Reinhart and Kenneth Rogoff
-
Fixing Exchange Rates: A Virtual Quest for Fundamentals
By Robert P. Flood and Andrew Kenan Rose