I want to know from people with more economic/financial knowledge than myself, what would be the implications if Pakistan was to decide to make the rupee backed by gold standard instead of backed by the US dollar?
Gold standard was abandoned for good; though there is much disagreement about its effect on over macroeconomic stability.
If Pak rupee is backed by gold, the country can only print as much money as its gold reserve warrants, a primary disadvantage.
Although G.S inspired confidence and was self-adjusting but system was only limited to the amount of gold. (Self-adjusting in the sense that when countries had a trade surplus, they accumulated gold as payment, and their money supply increased by the amount dictated by fixed rate parity, rising prices and falling exports and vice versa. Thus, it also had effects on productivity of the countries, and if every country starts protecting its production sectors, it will cause episodes of deflation and hyperinflation as happened in 1930s.)
If your concern is currency regime, then there is too many of them i.e. fixed parity, currency board, target zone, crawling peg, crawling band etc etc, but the best for Pakistan is the current regime i.e. Managed float (dirty float).
Watch the documentary it will also explain how inflation will just keep rising and would never be controlled.
Inflation can be managed experiencing some costs. (For investors, inflation-linked bonds are available.)
Expected inflation is okay but what concerns more is unexpected inflation which is more costly.
Anyway, it can be managed using tight monetary policy along fiscal policy but it may have adverse effects on output/demand:
1- Tight Monetary policy/easy fiscal policy: cut in taxes, increase in govt spending leading to rise in agg. output, but at the same time, tight monetary policy (high interest rate-reduction in money supply) offsets fiscal expansion, leading to negative effect on private demand.
2- Tight Monetary policy/tight fiscal policy: rise in IR, reduction in private demand, and at the same time, higher taxes and fall in govt spending leading to drop in agg. Demand from both public and private sectors.
But nowadays, political govt in some countries make policies so inflation doesn't surpass a certain %age (i.e. 2-3%), this is known as Inflation Targeting. Started in New Zealand in 1988 and is adopted by many countries.
After watching that documentary, i understand how the US is able to spend so much money on weapons and stay as a super power, because they can just print their wealth, while the rest of the world has to work really hard to acquire the wealth that the US printed.
Smithsonian Agreements.
