The Gold Standard
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Transcript of The Gold Standard
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The Gold StandardSpring 2010: Open Economy Macroeconomics
Brittany Causey
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How does a Gold Standard work?
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How does a Gold Standard Work?
Each country fixes the price of its currency in terms of gold by standing ready to trade domestic currency for gold when necessary to defend the official price.
Each country is responsible for pegging its currency’s price in terms of the official international reserve asset, gold.
Results in fixed exchange rates between all currencies.
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Monetary Policy Under a Gold
Standard
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Monetary Policy Under a Gold Standard:
Example Bank of England increases MS by purchasing domestic assets. Increase in
MS decreases Rpound making foreign assets more attractive. Sell pounds to Bank of England for gold, then sell gold to other Central
Banks for their currencies. Use new currencies to buy deposits with higher R than Rpound.
Bank of England loses reserves because it is forced to buy pounds and sell gold to keep the pound price of gold fixed. Foreign Central Banks gain reserves as they buy gold with their currencies
British MS decreases causing Rpound to increase and Foreign MS increases causing R to decrease until R is equal across countries and asset market is in equilibrium. Total world MS increases by amount of Bank of England’s initial domestic asset purchase and R lower throughout the world.
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Monetary Policy Under a Gold Standard:
Summary International monetary adjustment under a
gold standard is symmetric Whenever one country is losing reserves
and its money supply is decreasing, foreign countries are gaining reserves and seeing their money supplies expand.
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Benefits of the Gold Standard
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Benefits of the Gold Standard
Money supply cannot grow more rapidly than real money demand
Places automatic limits to increases in national price levels through expansionary monetary policy
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Drawbacks of the Gold Standard
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Drawbacks of the Gold Standard
Undesirable constraints on use of monetary policy to fight unemployment.
Tying currency values to gold ensures a stable overall price level only if the relative price of gold and other goods and services is stable.
Central Banks cannot increase their holding of international reserves as their economies grow unless there are continual new gold discoveries
Countries with potentially large gold production have ability to influence world macroeconomic conditions through market sales of gold.
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The Bimetallic Standard
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The Bimetallic Standard
Currency based on both gold and silver Could reduce the price level instability
resulting from use of just one metal as the standard.
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The Gold Exchange Standard
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The Gold Exchange Standard
Halfway between the gold standard and a pure reserve currency standard
Central Bank’s reserves include gold and currency whose price in terms of gold are fixed, and each central bank fixes its EXRA to a currency with a fixed gold price.
Restrains excessive money growth, but allows more flexibility in growth of international reserves