The Exchange Rate and the International Transmission of Business Cycle Disturbances.

This article analyzes the relationship between exchange rate and international transmission of business cycle in Europe during the Great Depression. Eight small European countries that followed three different types of exchange rate policies are examined. Researchers focused on small countries to highlight the importance of the exchange rate system in the transmission of exogenous foreign business cycle disturbances. Four of the countries (the Netherlands, Belgium, Italy, and Poland) operated on fixed exchange rates with the United States, causing them to suffer a severe contraction in both output and prices similar to that of the United States. It is noted that Spain enjoyed fairly stable output and prices during the Great Depression by maintaining a flexible exchange rate system.