Commitment to the Gold Standard

Commitment to the Gold Standard - Commitment to the Gold...

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Commitment to the Gold Standard J. Lawrence Broz · Abstract o Gold standard was a commitment mechanism designed to resolve time inconsistency problems in macroeconomc policy o Some nations more successful in making/maintaining commitment than others o AUTHOR ARGUES § Political system instability and non democratic political institutions reduced the ability of nations to credibly commit to gold § Interest group pressure from the export sector during the deflationary era (1880-1897) made adherence to gold less likely · 1880-1914 an integrated world economy forged for the first time · At center of integrated economy was the gold standard (rule based monetary regime that stabilized exchange rates and lent credibility/predictability to government’s macroeconomic policies) · Gold standard operated differently for developed/undeveloped countries o Industrialized “core’ countires able to adopt and maintain gold standard throughout the period o Some “Peripheral” developing countries never joined regime while others joined it when conditions were favorable (when domestic/external policies did not conflict) but abandoned it when economic conditions deteriorated · Developing countries had stronger incentive to join gold Standard yet found it more difficult to adopt/maintain the regime · Benefits of commitment to the gold standard was international capital (necessary for development) on favorable terms · Even most successful periphery countries never attained levels of commitment seen in North Atlantic Core · Classical Gold standard was a commitment mechanism designed to resolve the time inconsistency problem in fiscal and monetary policy · AUTHOR [commitment to gold required certain favorable political conditions in addition to the economic circumstances emphasized in existing literature) · [Author Arguments] o Greater Political instability reduces the capacity of governents to make credible commitments because political volatility shortens the time horizons of political leaders and theregy induces uncertainty about the future course of policy o Nations with democratic Institutions were more likely than non democratic nations to commit to gold standard (pre 1914 democracy refers to “Bourgeois” Democracy) o Nations with powerful traded goods producers will have had more difficult experiences fommitting to the Gold standard § 1870’s to 1897, price levels fell globally as the demand for gold outstripped supply § During this deflationary period prior to 1897 adopting gold standard meant rela appreciation of currency which harmed producers of traded goods and benefitted nontradables producers · Bourgeois Democracy (pre 1914) o Participation limited to propertied capital owners and net asset holders (groups that benefitted from stable prices and exchange rates) o Decisions over money were taken out of the hands of the sovereign (who had incentive to pursue time inconsitent policies) and
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Commitment to the Gold Standard - Commitment to the Gold...

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