Gold, Fiat Money, and Price Stability

Abstract

Which monetary regime is associated with the most stable price level? A commodity money regime such as the classical gold standard has long been associated with long-run price stability. But critics of the day argued that the regime was associated with too much short-run price variability and argued for reforms that look much like modern versions of price-level targeting. In this paper, we develop a dynamic stochastic general equilibrium model that we use to examine price dynamics under four alternative regimes. They are the gold standard, Irving Fisher's compensated dollar proposal, and two regimes with paper money in which the central bank uses an interest rate rule to run monetary policy. In the first, the central bank uses an interest rate rule to target the price of gold. In the second, there is no convertibility and the central bank targets uses an interest rate rule to target an inflation rate. We find that strict inflation targeting, even though it introduces a unit root into the price level, provides more short-run stability than the gold standard and as much long-term price stability as does the gold standard for horizons shorter than 30 years. We find that Fisher's compensated dollar reduces price level and inflation uncertainty by an order of magnitude at all horizons.

Return to Gold-Based Monetary System: Analysis Based on Gold Price and Inflation

“…While gold price during the gold standard era has shown a consistent stability than during the era of floating currency system. Thus, these findings support previous findings carried out by Bordo (2007;1993;, Lassonde (2005), Jastram 1997 andCraig (1995).…”

Irving Fisher and Price-Level Targeting in Austria: Was Silver the Answer?

“…This implies that, irrespective of whether Austria was part of the gold bloc, a "silver rule" would have been much more likely to stabilize aggregate prices than a gold-based policy. Using a simple policy focusing only on silver, our results for Austria are consistent with Bordo, Dittmar and Gavin's (2007) finding that Fisher's compensated dollar plan is superior to the gold standard.…”

“…The hypothetical gains from an historical implementation of Fisher's compensated dollar are demonstrated byBordo, Dittmar and Gavin (2007), who find significant reductions in price level and inflation uncertainty compared to the gold standard. Following the demise of the classical gold standard in 1914, many observers besides Fisher sought to arrive at a commodity bundle that would track the aggregate price level (seeBurdekin 2007) Lewis (1925),.…”

Deflation and Monetary Policy in a Historical Perspective: Remembering the Past or Being Condemned to Repeat It?

“…As under the gold standard, this policy would generate alternating periods of transitory inflation and deflation. Such an approach would have the advantage of long-run price predictability, which conventional inflation targeting regimes do not (Bordo, Dittmar and Gavin (2003), Riksbank (2003), Svensson (1999b)). But it could have the disadvantage of short-run volatility if downward nominal rigidities were important.…”