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JMK: "To-day, all civilized money is, beyond the possibility of dispute,chartalist."PK'ers and "monetary realists" take note, please.
If fiat currency has an inflationary bias, does something like a Gold Standard have a deflationary bias? If so, anyone have a link that explains this in some detail?
Don't have a link offhand, but a convertible fixed rate regime has less policy space than a non-convertible flexible rate regime, so govt is less able to addressing shifts in non-govt saving desire with its fiscal balance. Under a non-convertible flexible rate regime, there is no operational limit on deficits other than availability of real real resources relative to effective demand, i.e. the financial constraint is inflation. But under a convertible fixed rate regime, the size of the fiscal balance is limited by gold reserves and conversion rate. To get more gold without getting it from net exports, govt has to buy it which means the cb issuing more currency. This depresses the fx rate and induces more conversion. the way to prevent excessive convertibility is to raise interest rates, which chokes off the economy by driving up the cost of credit.That is to say, the eye is on changes in conversion rate domestically and externally. Setting the interest rate high enough to prevent excessive conversion of the currency into gold becomes a policy requirement, so domestic policy has to be subservient to the exogenous requirement that convertibility imposes.With free trade, external policy cannot be addressed directly, e.g., with changes in tariffs, but must be addressed indirectly through interest rates. Elevated interests rates to prevent conversion also result in elevated domestic saving. If deficits do not offset, non-govt saving then economic contraction will ensue. So the mechanics of maintaining the fx rate are addressed pretty much the same as with increasing domestic inflation rate now, that is, by increasing UE.The upshot is that with the increased policy space provided by a non-convertible flexible rate regime, a govt can adjust its fiscal balance to address increased rate of saving without focusing on the interest rate, but under a convertible system, managing the interest rate and fx rate become crucial to managing convertibility. This creates a deflationary bias when non-govt saving desire increases and there is little policy space to address it.
Gold standard cycles repetitively through boom and bust, with the busts being particularly bad.The economy would grow and wages would rise as credit expanded relative to the stock of gold, then as inflation began to appear credit would be suddenly contracted (by banks) and interest rates raised (by government and banks), leading to a crash, business failures, bank panics and bank collapses, bankruptcies and high unemployment. This would then lead to wages and prices being forced down, leading to the cycle starting over again. In the short term prices were more volatile under the gold standard.
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