Working Paper: CEPR ID: DP5430
Authors: Natasha Chernyshoff; David S. Jacks; Alan M. Taylor
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 Codes: F33; F41; N10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| terms of trade volatility (F14) | real exchange rate volatility (F31) |
| nominal rigidities (D50) | efficacy of the gold standard as a shock absorber (F33) |
| gold standard adherence (E42) | real exchange rate volatility (F31) |
| flexible exchange rates (F31) | real exchange rate volatility (F31) |
| transition from flexible to rigid macroeconomic environment (E65) | performance of the gold standard (N13) |
| gold standard before World War I (N13) | stabilizing effect on real exchange rates (F31) |
| gold standard after 1918 (N14) | increased volatility in real exchange rates (F31) |