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

Current account reversals under the Gold Standard (1880–1913) – a fixed exchange rate regime – were accompanied by few, if any, output losses. To understand why, we build and estimate an open economy model of the Gold Standard, which allows us to quantitatively assess the importance of three channels of external adjustment: flexible prices, international migration, and monetary policy. Our first finding is that flexible prices were the most influential channel through which output was stabilized, whereas migration and monetary policy mattered little. Our second finding is that price flexibility was predicated on large primary sectors. Their flexibly priced products dominated the export booms that stabilized output during major external adjustments.