Managing Currency Pegs

18 Pages Posted: 28 Sep 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: May 2012

Abstract

The combination of a fixed exchange rate and downward nominal wage rigidity creates a real rigidity. In turn, this real rigidity makes the economy prone to involuntary unemployment during external crises. This paper presents a graphical analysis of alternative policy strategies aimed at mitigating this source of inefficiency. First- and second-best monetary and fiscal solutions are analyzed. Second-best solutions are prudential, whereas first-best solutions are not.

Keywords: capital controls, Currency pegs, downward nominal wage rigidity, pecuniary externality

JEL Classification: E31, E62, F41

Suggested Citation

Schmitt-Grohe, Stephanie and Uribe, Martin, Managing Currency Pegs (May 2012). CEPR Discussion Paper No. DP8983, Available at SSRN: https://ssrn.com/abstract=2153415

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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