Did the Classical Gold Standard Promote Inflation Convergence?

Adherence to the classical gold standard entailed nominal exchange rate rigidity between member countries. A failure of price levels to co-move between members would thus lead to real exchange rate misalignment, with potential trade imbalances and financial crises following. We examine inflation differentials between gold standard (and for comparison, non-gold standard) members. Results indicate generally less correlation of prices across countries than in subsequent Bretton Woods and floating regimes. Examination of inflation differentials indicates a general but not universal pattern of less persistence in these differences during the gold standard than in later monetary regimes. The lesser persistence in differentials, however, might not be attributable to gold adherence, as some of the pairs had a country rarely or never pegged to gold. In addition, previous research has found fewer nominal rigidities in the classical gold standard years, making for easier price adjustment. Finally, we use the sequential panel selection method (SPSM) with panel unit root tests over the gold standard. We find there is no pattern between gold adherence and the persistence of inflation differentials. Overall, results suggest little if any impact of gold adherence on inflation co-movement between countries