10-year Simulation of Commodity-Based Convertibility of the Pakistan Rupee: a Model for Developing a D-8 Currency Bloc.

The fiat currencies being used worldwide suffer from inflation, instability of exchange-rates and manipulation by larger countries. The traditional means of stabilising the value of a currency is through guaranteeing its convertibility into real goods, such as with a gold standard. Re-introducing a gold standard today faces major difficulties, and since the 19th century, the idea of making currency convertible into a range of other commodities than gold and silver has been recognised as economically beneficial. This paper considers the little-known system of conditional currency convertibility based on primary commodities devised by the Australian economist Grondona as a means for individual countries to introduce an element of real convertibility into their monetary system, more flexible than the rigid convertibility of the classical gold standard. Conveniently, since the system is activated by market prices it is possible to simulate it realistically, and the paper uses the "C" language to simulate the operation of the "Grondona System" implemented in Pakistan through the decade 2009-2018. The results show how the system's market-driven, counter-cyclical stock-holding would have expanded the Rupee money supply as commodity prices fell, and reduced it proportionately as commodity prices rose again, driven by market prices. This would have helped to stabilise the real value of the Rupee, as well as the value of commodity imports over the trade cycle, thereby reducing fluctuations in Pakistan's trade balance and exchange-rate. Since the Grondona System is Shariah-compliant, this shows how the D-8 countries could stabilise currencies and partially stabilise their mutual exchange-rates. [ABSTRACT FROM AUTHOR]