Abstract

http://ssrn.com/abstract=1526836
 
 

References (30)



 


 



Unemployment Persistence and the Sustainability of Exchange Rate Pegs


Olli Castrén


affiliation not provided to SSRN

Tuomas Takalo


Bank of Finland, Monetary Policy and Research Department

Geoffrey Wood


Cass Business School

2009-04-17

Scottish Journal of Political Economy, Vol. 57, Issue 1, pp. 85-102, February 2010

Abstract:     
It is commonly thought that an open economy can accommodate output shocks through either exchange rate or real sector adjustments. We formalize this notion by incorporating unemployment persistence into a two-sided escape clause model of currency crises. We show that unemployment persistence makes a currency peg more fragile and undermines the credibility of the monetary authority in a dynamic setting. The fragility is captured by a devaluation premium in expectations that increases the average inflation rate when the currency peg is more vulnerable to ‘busts’ than ‘booms’. This interaction between macroeconomic and microeconomic rigidities suggests that a policy reform can only be consistent if it renders either exchange rates or the economy more flexible.

Number of Pages in PDF File: 18

Accepted Paper Series





Date posted: December 22, 2009  

Suggested Citation

Castrén, Olli and Takalo, Tuomas and Wood, Geoffrey, Unemployment Persistence and the Sustainability of Exchange Rate Pegs (2009-04-17). Scottish Journal of Political Economy, Vol. 57, Issue 1, pp. 85-102, February 2010. Available at SSRN: http://ssrn.com/abstract=1526836 or http://dx.doi.org/10.1111/j.1467-9485.2009.00508.x

Contact Information

Olli Castrén (Contact Author)
affiliation not provided to SSRN
No Address Available
Tuomas Takalo
Bank of Finland, Monetary Policy and Research Department ( email )
P.O. Box 160
Helsinki, FIN-00101
Finland
+358108312370 (Phone)
HOME PAGE: http://www.takalo.net
Geoffrey E. Wood
Cass Business School ( email )
London, EC2Y 8HB
Great Britain
+44 0 20 7040 8740 (Phone)
+44 0 20 7040 8881 (Fax)
Feedback to SSRN


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