The "Gold Standard Paradox" and its Resolution

54 Pages Posted: 14 Nov 2007 Last revised: 10 Mar 2021

See all articles by Willem H. Buiter

Willem H. Buiter

Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Columbia University; Independent Economic Adviser

Vittorio Grilli

Independent; National Bureau of Economic Research (NBER)

Date Written: November 1989

Abstract

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.

Suggested Citation

Buiter, Willem H. and Grilli, Vittorio, The "Gold Standard Paradox" and its Resolution (November 1989). NBER Working Paper No. w3178, Available at SSRN: https://ssrn.com/abstract=467629

Willem H. Buiter (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Columbia University ( email )

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New York, NY
United States

Independent Economic Adviser ( email )

Vittorio Grilli

Independent

Ministero del Tesoro
Direzione Generale del Tesoro Capo del Servizio I via XX Settembre 97

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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