Disinflation in an Open-Economy Staggered-Wage Dge Model: Exchange-Rate Pegging, Booms and the Role of Preannouncement
CDMA Working Paper No. 06/10
44 Pages Posted: 27 Oct 2006
Date Written: October 2006
Abstract
A dynamic general equilibrium model of an open economy with staggered wages is constructed. We analyse disinflation through pegging the exchange rate. In accordance with the stylised facts, an initial boom in output can result, depending on the exact level of the peg. The reason is an element of preannouncement in the policy. Disinflation through reducing monetary growth is shown to be equivalent to disinflation through pegging the exchange rate, if the latter includes an initial currency revaluation. This helps explain why such disinflation causes a short-run slump. The model can also help explain inflation persistence.
Keywords: Exchange-rate-based disinflation, money-based disinflation, staggered wages, preannouncement effects
JEL Classification: E52, E41
Suggested Citation: Suggested Citation
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