Inflation-proof Currency? The Feasibility of Variable Commodity Standards

Abstract

Under a proposal by Robert L. Greenfield and Leland B. Yeager (1989), the value of currency is tied to the value of a defined basket of goods by indirect convertibility: the note-issuing bank offers to redeem its currency for sufficient gold to buy the basket in the market. The authors find that this arrangement cannot be applied to the currency that is the medium of account for quoting prices of goods and that it would imply unlimited change in the gold price when the price of the basket deviates from unity. A feedback rule with slower price adjustment may, however, be feasible. Copyright 1993 by Ohio State University Press.