Working Paper: NBER ID: w16202
Authors: Barry Eichengreen; Peter Temin
Abstract: We describe in this essay why the gold standard and the euro are extreme forms of fixed exchange rates, and how these policies had their most potent effects in the worst peaceful economic periods in modern times. While we are lucky to have avoided another catastrophe like the Great Depression in 2008-9, mainly by virtue of policy makers' aggressive use of monetary and fiscal stimuli, the world economy still is experiencing many difficulties. As in the Great Depression, this second round of problems stems from the prevalence of fixed exchange rates. Fixed exchange rates facilitate business and communication in good times but intensify problems when times are bad.
Keywords: gold standard; euro; fixed exchange rates; Great Depression
JEL Codes: F33; N20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Gold standard adherence (E42) | contractionary policies (E65) |
| euro's fixed rates (F33) | contractionary policies (E65) |
| contractionary policies (E65) | negative impacts on employment and production (F66) |
| lack of flexibility in adjusting exchange rates (F31) | severe deflationary pressures (E31) |
| severe deflationary pressures (E31) | detrimental to economic recovery (F69) |
| absence of an international coordinating organization (F53) | economic challenges (F69) |