The "Gold Standard Paradox" and its Resolution / Willem H. Buiter, Vittorio U. Grilli.

Format:

Book

Author/Creator:

Buiter, Willem H.

Contributor:

National Bureau of Economic Research.

Grilli, Vittorio U.

Series:

Working Paper Series (National Bureau of Economic Research) no. w3178.

NBER working paper series no. w3178

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1989.

Summary:

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.

Notes:

Print version record

November 1989.