Did the Classical Gold Standard Lead to Greater Price Level Convergence? A New Approach

Abstract

Some previous research has indicated that the classical gold standard led to greater price level co-movement among member countries than would be observed in later Bretton Woods and floating exchange rate regimes. This paper examines the subject of price co-movement under the gold standard with a set of recently developed techniques which examine both differences in the magnitude as well as in the sign of price level movements across countries, and which yield period-by-period estimates of how coherent price levels are across nations. Our results suggest that contrary to previous research, the classical gold standard did not appear to lead to greater price level co-movement. Neither, moreover, did the gold standard appear to move prices apart, as would be expected if two countries joined the gold standard with misaligned inflation rates. These results are similar to those of more recent research on the classical gold standard, in which previous purported effects of the metallic standard (on the cost of capital, the level of trade, and business cycle synchronization) have been found either to not exist or to be much smaller in magnitude than previously believed.