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


Hanken School of Economics - Department of Economics; Helsinki Center of Economic Research (HECER)

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


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
Hanken School of Economics - Department of Economics ( email )
PO Box 479
FI-00101 Helsinki
Finland
HOME PAGE: http://https://sites.google.com/site/tuomastakalo/
Helsinki Center of Economic Research (HECER) ( email )
FI-00014 Helsinki
Finland
HOME PAGE: http://https://sites.google.com/site/tuomastakalo/
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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References:  30

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