The limits of internal devaluation: Switzerland during the great depression

Abstract During the Great Depression, countries endowed with abundant gold reserves were not able to leave standard and devalue their currencies until mid-1930s. Instead, they forced go down road of internal devaluation. We analyze policies Swiss authorities by estimating a New Keynesian small open economy model. Our results show that long adherence failure devaluation imposed considerable costs on economy. Moreover, counterfactual exercises suggest timely would have led an early recovery from Depression.