TY  - JOUR
AU  - Buiter,Willem H.
AU  - Grilli,Vittorio U.
TI  - The "Gold Standard Paradox" and its Resolution
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 3178
PY  - 1989
Y2  - November 1989
UR  - http://www.nber.org/papers/w3178
L1  - http://www.nber.org/papers/w3178.pdf
N1  - Author contact info:
Willem H. Buiter
Citigroup Centre
Canada Square, Canary Wharf
London E14 5LB
UNITED KINGDOM
E-Mail: willembuiter@btinternet.com

Vittorio U. Grilli
Ministero di Tesaro
Capo del Servizio T
via XX se tembre 97
Roma 00187 ITALY
Tel: 44/71/631-6407
E-Mail: Vittorio.grilli@tesoro.it
AB  - This paper analyzes Krugman's contention that there is a "gold standard paradox" in the speculative attack literature. The paradox occurs if a country's currency appreciates after it runs out of gold or equivalently if a speculative attack can happen only after the country "naturally" runs out of reserves. We first show that Krugman's paradox is a very general phenomenon which does not require mean reverting processes for the fundamentals and which can be present in discrete time models as well as in continuous time models. We present several specific cases in which the paradox occurs i.e. environments which do not support an equilibrium. Next we show that, contrary to Krugman's conjecture, it is not necessary to abandon the assumption of a perfectly fixed exchange rate in favor of a band system in order to recover a well-defined equilibrium. We propose two alternative ways of amending the model which produce an equilibrium and preserve the fixed exchange rate assumption.
ER  -