Did the non-adoption of the gold standard benefit or harm Spanish economy? A counterfactual analysis between 1870-1913

Abstract

This paper is an attempt to draw an overall picture of what would have happened if Spain had kept its exchange rate stable (and if there had been no exchange rate shocks affecting economic growth) between 1870 and 1913. It is said that in the face of dramatic economic shocks, the rigidities of the monetary system inhibited recovery, particularly in countries on the periphery. Would the impact of business cycles on Spain have been much greater if the country had kept its exchange rate stable? To answer this question, I present a counterfactual analysis based on the SVAR framework. The study also intends to highlight the importance of macroeconomic policies (run outside the gold standard) to explain economic growth fluctuations. Via an analysis of the historical decomposition of the variables, I aim to identify the ones that helped to increase growth and the ones that harmed the economy. My analysis sheds new light on the discussion of Spain’s non-adoption of the classical gold standard. Having a fixed exchange rate would have made growth declines deeper until the beginning of the 20th century; from that point on, the adoption of the gold standard would have been a good decision. The results presented in this paper provide new empirical evidence for the core-periphery debate addressing the period of the classical gold standard.