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A model of bimetallism

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Author Info
François R. Velde
Warren E. Weber

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Abstract

Bimetallism has been the subject of considerable debate: Was it a viable monetary system? Was it a desirable system? In our model, the (exogenous and stochastic) amount of each metal can be split between monetary uses to satisfy a cash-in-advance constraint, and nonmonetary uses in which the stock of uncoined metal yields utility. The ratio of the monies in the cash-in-advance constraint is endogenous. Bimetallism is feasible: we find a continuum of steady states (in the certainty case) indexed by the constant exchange rate of the monies; we also prove existence for a range of fixed exchange rates in the stochastic version. Bimetallism does not appear desirable on a welfare basis: among steady states, we prove that welfare under monometallism is higher than under any bimetallic equilibrium. We compute welfare and the variance of the price level under a variety of regimes (bimetallism, monometallism with and without trade money) and find that bimetallism can significantly stabilize the price level, depending on the covariance between the shocks to the supplies of metals.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Working Papers with number 588.

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Date of creation: 1998
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Publication status: Published in Journal of Political Economy (Vol. 108, No. 6, December 2000, pp. 1210-1234)
Handle: RePEc:fip:fedmwp:588

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Keywords: Bimetallism Gold

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Flandreau, Marc, 1995. "An Essay on the Emergence of the International Gold Standard, 1870-80," CEPR Discussion Papers 1210, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Friedman, Milton, 1990. "The Crime of 1873," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1159-94, December. [Downloadable!] (restricted)
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  3. Dowd, Kevin, 1996. "The Analytics of Bimetallism," The Manchester School of Economic & Social Studies, Blackwell Publishing, vol. 64(3), pages 281-97, September.
  4. Robert J. Barro, 1980. "Money and the Price Level under the Gold Standard," NBER Reprints 0032, National Bureau of Economic Research, Inc.
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  5. Thomas J. Sargent & Neil Wallace, 1983. "A model of commodity money," Staff Report 85, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  6. Kareken, John & Wallace, Neil, 1981. "On the Indeterminacy of Equilibrium Exchange Rates," The Quarterly Journal of Economics, MIT Press, vol. 96(2), pages 207-22, May. [Downloadable!] (restricted)
  7. Garber, Peter M, 1986. "Nominal Contracts in a Bimetallic Standard," American Economic Review, American Economic Association, vol. 76(5), pages 1012-30, December. [Downloadable!] (restricted)
  8. Friedman, M., 1989. "Bimetallism Revisited," Papers e-89-24, Stanford - Hoover Institution.
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  1. Antoine Martin, 2002. "Reconciling Bagehot with the Fed's response to Sept. 11," Research Working Paper RWP 02-10, Federal Reserve Bank of Kansas City. [Downloadable!]
  2. Elisa Newby, 2007. " Macroeconomic Implications of Gold Reserve Policy of the Bank of England during the Eighteenth Century," CDMA Working Paper Series 0708, Centre for Dynamic Macroeconomic Analysis. [Downloadable!]
  3. Angela Redish & Warren E. Weber, 2008. "Coin sizes and payments in commodity money systems," Working Papers 658, Federal Reserve Bank of Minneapolis. [Downloadable!]
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