A Two-Country Model of the Gold Standard

Abstract

The objective of this paper is to construct and analyse a two-country short-run model of the gold standard. Wages and prices respond flexibly in both countries; gold flows in reaction to payments imbalance at the mint par exchange rate; and the authorities refrain completely from sterilising these gold movements. The model and two of its variants are similar to one introduced by Metzler in a recently published article, but the conclusions here differ from his in several respects. Moreover, this paper considers two important disturbances not discussed in the Metzler article and extends his coverage of other disturbances.