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Mr. Tamim Bayoumi and Mr. Barry J. Eichengreen
This paper examines some popular explanations for the smooth operation of the pre-1914 gold standard. We find that the rapid adjustment of economies to underlying disturbances played an important role in stabilizing output and employment under the gold standard system, but no evidence that this success also reflected relatively small underlying disturbances. Finally, the paper also suggests an explanation for the evolution of the international monetary system based on growing nominal inertia over time.
Mr. Tamim Bayoumi and Mr. Barry J. Eichengreen

their maintenance. Invocation of the escape clause became rare, and the gold standard increasingly came to resemble a fixed exchange rate system. Questions nonetheless remain about whether the policy regime can explain the stability of the gold standard system. 5/ Some authors have looked instead to the nature of the underlying economic environment, and to the structure of commodity and factor markets in particular. The maintenance of the gold standard could be attributable simply to a favorable environment (relatively small and infrequent macroeconomic

International Monetary Fund. Research Dept.
This paper illustrates the important consequences of the choice of reserve assets. It considers hypothetical international reserve systems based on gold, on one or several national currencies, on an international financial asset that is not a national currency, and on a combination of these assets. The functioning and macroeconomic consequences of these reserve systems depend very much on the predominant exchange rate regime and on the flexibility of countries' prices and wages. The paper concludes that, because a considerable degree of exchange rate flexibility must be expected for some time to come, a gold-standard system does not offer a viable solution and should be ruled out. Under managed floating, with wages and prices inflexible downward, regulation of the amount of reserve creation, either through appropriately functioning market forces or through international surveillance, could make an important contribution to international economic stability. The patterns of private holding and use of historical reserve assets raise the question of whether there can be an important role for the special drawing rights in a future reserve system as long as its potential as a private asset remains undeveloped.
International Monetary Fund. Research Dept.

Recent years have witnessed a dramatic decline in inflation in emerging market economies. 1 By the end of 2000, average inflation in emerging markets had declined from triple-digit figures in the late 1980s to some 5 percent excluding a few outlier cases—Indonesia, Turkey, and Venezuela ( Table 4.1 ). Such low levels of inflation have not been seen since before World War II, when, mostly under the discipline of the gold standard system of fixed exchange rates, prices were roughly stable and episodes of deflation were not uncommon. The recent decline of

Mr. Tamim Bayoumi and Mr. Barry J. Eichengreen

nonetheless remain about whether the policy regime alone can explain the stability of the gold standard system. Some authors have looked instead to the nature of the underlying economic environment. The maintenance of the gold standard could be attributable simply to a favorable environment (relatively small and infrequent macroeconomic disturbances) or to the flexibility of markets (relatively fast adjustment of prices and quantities to those disturbances which occurred). This paper assesses the evidence on the incidence of macroeconomic disturbances and the speed of

International Monetary Fund. External Relations Dept.

of Seven countries have no mandate to stabilize world markets. In discussing exchange rate options in emerging market countries, full weight needs to be given, Calvo observed, to the environment in which that policy will be implemented. Capital in emerging markets has been moving with an intensity not seen since the late nineteenth and early twentieth centuries. This suggests that a system of fixed exchange rates—like the gold standard system of that era—might again be appropriate. Fear of floating Turning to the broad issue of whether a fixed or floating

Juanita Roushdy

system. The discipline of the gold standard thus provided a kind of automatic surveillance over the balance of payments adjustment of countries that opted to follow the unwritten rules of that system. This automatic surveillance was, in principle, symmetrical in that payments surpluses generated expansionary pressure just as deficits generated contractionary impulses. Although countries could opt out of the system—and some did, for shorter or longer intervals—the stabilizing effect of the gold standard system on the world economy was assured as long as a substantial

Anne Romanis

not prepared to operate a fully automatic adjustment system. It arises, for instance, under a system of managed flexible exchange rates, where fluctuations in rates are smoothed by official intervention. It is liable to arise in practice under any gold standard system because the gold-receiving country is under no equal compulsion to expand credit and allow its prices to rise, when the gold-losing country has to contract credit to maintain its reserves. Furthermore, in the real world of price inflexibility and structural rigidities, countries have a strong incentive

Frank A. Southard

standard system. If it involves, or as time passes it comes to involve, a large overvaluation or undervaluation of the currency, the magnitude of the deflationary or inflationary adjustments that would be called for may be beyond the capacity of the system to carry through. The United Kingdom in the years after World War I is probably the most important and interesting example of this. Following the impoverishment and destruction of capital caused by that terrible war and the impact of other structural changes on the economy, the pound sterling became a much weaker