Inflation is a cause of worry in the US when the BRICS alliance is looking to dump the dollar. BRICS also accumulated tonnes of gold in 18 months becoming the largest purchaser of the precious metal in FY 202-24. Researchers with the Federal Reserve Bank of Philadelphia published a report citing that switching to the gold standard could stabilize prices.
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The researchers argued that if the US transitions to the gold standard, it would make money non-neutral. Shifting from the US dollar-based economy to the gold standard will converge to the economy’s long-run equilibrium value. This in turn would make inflation and deflation in the US a “merely temporary phenomena,” wrote the bank researchers. BRICS could be following similar ideals as speculations are rife that they could back their yet-to-be-released currency with gold.
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BRICS: Switching To Gold Standard Helps US Economy In the Long-Turn
The authors explained that switching to the gold standard will only cause short-term shocks, but in the long term will become a self-correcting economy. “While the gold standard exposes the home country to short-term fluctuations in money, prices, and output caused by external shocks, it ensures long-term price stability as the quantity of money and prices only temporarily deviate from their steady-state levels.”
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“Because money is non-neutral, these price movements have real effects,” wrote the authors. “At least some home-country agents will be strictly worse off in the transition path,” they said.
For the uninitiated, the gold standard monetary system was the norm for many leading economies around the world for centuries. However, the financial system turned out inflexible and eventually collapsed at the beginning of the 20th century. BRICS might be considering making the system alive and backing their new currency with gold. Read here to know how many sectors in the US will be affected if BRICS ditches the dollar for trade.