Working Paper: NBER ID: w11795
Authors: Natalia 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: No keywords provided
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 |
|---|---|
| classical gold standard (N13) | real exchange rate volatility (F31) |
| interwar gold standard (F33) | real exchange rate volatility (F31) |
| gold standard (E42) | real exchange rate volatility (prewar period) (N13) |
| gold standard (E42) | real exchange rate volatility (post-1918) (F31) |
| shift from flexible economy (E69) | nominal rigidities (D50) |
| terms of trade shocks (F14) | real exchange rate volatility (F31) |
| nominal rigidities (D50) | real exchange rate volatility (F31) |