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We estimate the causal impact of countercyclical monetary policy on macroeconomic outcomes for open economies subject to external demand shocks. To identify exogenous monetary-policy and external-demand shocks, we construct a new database of short-term interest rates, principal exports, and international commodity prices for 30 economies for 1870-1913, an era when capital flowed unencumbered and economies followed a nominal anchor but were subjected to the “commodity lottery.” We use this quasi-natural experiment from history to identify causal, positive, effects of exogenous commodity-export prices on real GDP and on domestic prices (external-demand shocks); and causal negative effects from exogenous changes in short-term rates (monetary-policy shocks). We further show that countercyclical monetary policy stabilized output and domestic prices following external-demand shocks. Stabilization policy is more effective for prices than output, and stronger for output following positive external-demand shocks.
