Pegs, Downward Wage Rigidity, and Unemployment: The Role of Financial Structure

25 Pages Posted: 14 Jul 2012

See all articles by Stephanie Schmitt-Grohé

Stephanie Schmitt-Grohé

Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Martín Uribe

Columbia University - Graduate School of Arts and Sciences - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: July 2012

Abstract

This paper studies the relationship between financial structure and the welfare consequences of fixed exchange rate regimes in small open emerging economies with downward nominal wage rigidity. The paper presents two surprising results. First, a pegging economy might be better off with a closed than with an open capital account. Second, the welfare gain from switching from a peg to the optimal (full-employment) monetary policy might be larger in financially open economies than in financially closed ones.

Suggested Citation

Schmitt-Grohe, Stephanie and Uribe, Martin, Pegs, Downward Wage Rigidity, and Unemployment: The Role of Financial Structure (July 2012). NBER Working Paper No. w18223, Available at SSRN: https://ssrn.com/abstract=2105968

Stephanie Schmitt-Grohe (Contact Author)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

National Bureau of Economic Research (NBER)

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Martin Uribe

Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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