Monetary policy and commodity money equilibria

Abstract

Commodity monies are thought to be desirable because of their ease-of-implementation and their generation of stable prices. This paper presents an investigation into these properties and a derivation of the restrictions commodity monies place on monetary policy. It is found that for commodity money systems to be feasible, monetary policy must follow a feedback rule which is a function of the growth rates for all asset stocks and in general a reduction in economic welfare accrues to agents in a commodity money economy. Moreover, the restrictions implied by a commodity money system are often inconsistent with existence of equilibrium.