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.

External adjustment, Migration, Target Zone, Price Rigidity, DSGE, Bayesian estimation, Real effective exchange rate.
Macroeconomics and Monetary Economics; Growth and Fluctuations (jel N1), International Factor Movements and International Business (jel F2), Monetary Policy, Central Banking, and the Supply of Money and Credit (jel E5)
Journal of International Economics
Erasmus School of Economics

Ward, F.P.L, & Yao, C. (2018). When do fixed exchange rates work?. Journal of International Economics, 116, 158–172. Retrieved from http://hdl.handle.net/1765/120834