TY  - JOUR
AU  - Bordo,Michael D.
AU  - Dittmar,Robert D.
AU  - Gavin,William T.
TI  - Gold, Fiat Money, and Price Stability
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10171
PY  - 2003
Y2  - December 2003
UR  - http://www.nber.org/papers/w10171
L1  - http://www.nber.org/papers/w10171.pdf
N1  - Author contact info:
Michael D. Bordo
Department of Economics
Rutgers University
New Jersey Hall
75 Hamilton Street
New Brunswick, NJ 08901
Tel: 732/822-7152
Fax: 732/932-7416
E-Mail: bordo@econ.rutgers.edu

Robert Dittmar
Stephen M. Ross School of Business
University of Michigan
701 Tappan Street
Ann Arbor, MI 48109
Tel: 734/763-6821
E-Mail: rdittmar@bus.umich.edu

William Gavin
AB  - Which monetary regime is associated with the most stable price level? A commodity money regime such as the classical gold standard has long been associated with long-run price stability. But critics of the day argued that the regime was associated with too much short-run price variability and argued for reforms that look much like modern versions of price-level targeting. In this paper, we develop a dynamic stochastic general equilibrium model that we use to examine price dynamics under four alternative regimes. They are the gold standard, Irving Fisher's compensated dollar proposal, and two regimes with paper money in which the central bank uses an interest rate rule to run monetary policy. In the first, the central bank uses an interest rate rule to target the price of gold. In the second, there is no convertibility and the central bank targets uses an interest rate rule to target an inflation rate. We find that strict inflation targeting, even though it introduces a unit root into the price level, provides more short-run stability than the gold standard and as much long-term price stability as does the gold standard for horizons shorter than 30 years. We find that Fisher's compensated dollar reduces price level and inflation uncertainty by an order of magnitude at all horizons.
ER  -