When do fixed exchange rates work? Evidence from the Gold Standard

External adjustment under the Gold Standard – a fixed exchange rate regime – was associated with few, if any, output costs. This paper evaluates how flexible prices, international migration, and monetary policy contributed to this benign adjustment experience. For this purpose, we build and estimate an open economy model for the Gold Standard (1880-1913). We find that the output resilience of Gold Standard members that underwent external adjustment was primarily a consequence of flexible prices. When hit by a shock, quickly adjusting prices induced import- and exportresponses that stabilized incomes. Crucial in this regard was a historical contingency: namely large primary sectors, whose flexibly priced products drove the export booms that stabilized output during major external adjustments.