Price-Level Determination Under the Gold Standard

Jesus Fernandez-Villaverde and Daniel Sanches

No 24-06, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: We present a micro-founded monetary model of a small open economy to examine the behavior of money, prices, and output under the gold standard. In particular, we formally analyze Hume’s celebrated price-specie flow mechanism. Our framework incorporates the influence of international trade on the money supply in the Home country through gold flows. In the short run, a positive correlation exists between the quantity of money and the price level. Additionally, we demonstrate that money is non-neutral during the transition to the steady state, which has implications for welfare. While the gold standard exposes the Home country to short-term fluctuations in money, prices, and output caused by external shocks, it ensures long-term price stability as the quantity of money and prices only temporarily deviate from their steady-state levels. We discuss the importance of policy coordination for achieving efficiency under the gold standard and consider the role of fiat money in this environment. We also develop a version of the model with two large economies.

Keywords: Gold standard; specie flows; non-neutrality of money; long-run price stability; inelastic money supply (search for similar items in EconPapers)
JEL-codes: E42 E58 G21 (search for similar items in EconPapers)
Pages: 48
Date: 2024-02-28
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-fdg, nep-his and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:97882

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DOI: 10.21799/frbp.wp.2024.06

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