Gold, Fiat Money, and Price Stability

Michael Bordo, Dittmar Robert D () and William Gavin ()
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Dittmar Robert D: Risk Analytics

The B.E. Journal of Macroeconomics, 2007, vol. 7, issue 1, 31

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 (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (6)

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Related works:
Working Paper: Gold, fiat money and price stability (2006)
Working Paper: Gold, Fiat Money, and Price Stability (2003)
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DOI: 10.2202/1935-1690.1525

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