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:
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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:
https://www.gata.org/sites/default/files/PhiladelphiaFedGoldStandardStudy_0.pdf [5]
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