Working Paper: NBER ID: w10171
Authors: Michael D. Bordo; Robert T. Dittmar; William T. Gavin
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.
Keywords: No keywords provided
JEL Codes: E31; E42; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Commodity money regime (E42) | Long-run price stability (E31) |
| Commodity money regime (E42) | Short-run price variability (E39) |
| Strict inflation targeting (E31) | More short-run stability (E32) |
| Strict inflation targeting (E31) | Comparable long-term price stability (horizons shorter than 30 years) (G19) |
| Fisher's compensated dollar (F31) | Reduces price level and inflation uncertainty (E31) |