Gold, Fiat Money and Price Stability

FRB of St. Louis Working Paper No. 2003-014D

31 Pages Posted: 20 Apr 2006

See all articles by Michael D. Bordo

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics; National Bureau of Economic Research (NBER)

Robert Dittmar

Citigroup, Inc. - CitiMortgage

William T. Gavin

Federal Reserve Bank of St. Louis - Research Division; University of Memphis Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 2007

Abstract

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.

Keywords: Gold standard, compensated dollar, inflation targeting

JEL Classification: E31, E42, E52

Suggested Citation

Bordo, Michael D. and Dittmar, Robert D. and Gavin, William T., Gold, Fiat Money and Price Stability (May 2007). FRB of St. Louis Working Paper No. 2003-014D. Available at SSRN: https://ssrn.com/abstract=896282 or http://dx.doi.org/10.2139/ssrn.896282

Michael D. Bordo (Contact Author)

Rutgers University, New Brunswick - Department of Economics ( email )

New Brunswick, NJ
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Robert D. Dittmar

Citigroup, Inc. - CitiMortgage ( email )

St. Louis, MO
United States

William T. Gavin

Federal Reserve Bank of St. Louis - Research Division ( email )

441 Locust Street
P. O. Box 442
St. Louis, MO 63166
United States
314 873-8422 (Phone)

HOME PAGE: http://www.gavinecon.com

University of Memphis Department of Economics ( email )

Memphis, TN 38152
United States

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