Alternative monetary constitutions and the quest for price stability

This article reviews the various means through which governments and central banks have sought to guarantee long-run price stability. Finn Kydland and Mark Wynne argue that monetary regimes or standards can all be viewed as more or less successful attempts to overcome the well-known time-consistency problem in monetary policy. The classical gold standard, which prevailed in the late nineteenth and early twentieth centuries, can be interpreted as a monetary policy rule that delivered long-run price stability. The fiat monetary standard adopted by countries following the abandonment of gold allows greater discretion on the part of monetary policymakers and has been characterized by greater long-run price instability. Countries have tried through a variety of means to regain the benefits of price stability that prevailed under the earlier gold standard by limiting the scope for discretionary actions on the part of central bankers. A close analogy exists between the gold standard and the currency board arrangements proposed for many emerging market economies in recent years.