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Switch to gold standard could stabilize prices, Philly Fed researchers find

Section: Daily Dispatches

From Central Banking, London
Tuesday, March 26, 2024

Long-run price stability could be a key feature of the gold standard, researchers with the Federal Reserve Bank of Philadelphia find.

In their working paper, published in February, Jesus Fernandez-Villaverde and Daniel Sanches explore how the gold standard would operate as a monetary framework in a hypothetical small open economy.

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They argue that the price level would consistently converge to its long-run equilibrium value. Inflation and deflation would be "merely temporary phenomena." ...

... For the remainder of the report:


Price-Level Determination Under the Gold Standard

By Jesus Fernandez-Villaverde and Daniel Sanches
Federal Reserve Bank of Philadelphia
January 9, 2024

We present a micro-founded monetary model of a small open economy to examine the behavior of money, prices, and output under the gold standard. 

In particular, we formally analyze Hume's celebrated price-specie flow mechanism. 

Our framework incorporates the influence of international trade on the money supply in the home country through gold flows.

In the short run, a positive correlation exists between the quantity of money and the price level. Additionally, we demonstrate that money is non-neutral during the transition to the steady state, which has implications for welfare. 

While the gold standard exposes the home country to short-term fluctuations in money, prices, and output caused by external shocks, it ensures long-term price stability as the quantity of money and prices only temporarily deviate from their steady-state levels. 

We discuss the importance of policy coordination for achieving efficiency under the gold standard and consider the role of fiat money in this environment. We also develop a version of the model with two large economies. ...

... For the full text of the study:

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PDF icon PhiladelphiaFedGoldStandardStudy.pdf693.71 KB