A BEJM Topics article.

Abstract

The classical gold standard has long been associated with long-run price stability. But short-run price variability led critics of the gold standard to propose reforms that look much like modern versions of price-path targeting. This paper uses a dynamic stochastic general equilibrium model to examine price dynamics under alternative policy regimes. In the model, a pure inflation target provides more short-run price stability than does the gold standard and, although it introduces a unit root into the price level, it leads to as much long-term price stability as does the gold standard for horizons shorter than 20 years. Relative to these regimes, Fisher's compensated dollar (or pure price-path targeting) reduces inflation uncertainty by an order of magnitude at all horizons. A Taylor rule, with its relatively large weight on output, leads to large uncertainty about inflation at long horizons. This long-run inflation uncertainty can be largely eliminated by introducing an additional response to the deviation of the price level from a desired path.

Submitted: November 16, 2006 · Accepted: May 13, 2007 · Published: August 9, 2007

Recommended Citation

Bordo, Michael D.; Dittmar, Robert D.; and Gavin, William T. (2007) "Gold, Fiat Money, and Price Stability," The B.E. Journal of Macroeconomics: Vol. 7 : Iss. 1 (Topics), Article 26.
Available at: http://www.bepress.com/bejm/vol7/iss1/art26