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

See all articles by John Fender

John Fender

University of Birmingham - Department of Economics

Neil Rankin

University of Warwick - Department of Economics; Centre for Economic Policy Research (CEPR)

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

Fender, John and Rankin, Neil, Disinflation in an Open-Economy Staggered-Wage Dge Model: Exchange-Rate Pegging, Booms and the Role of Preannouncement (October 2006). CDMA Working Paper No. 06/10, Available at SSRN: https://ssrn.com/abstract=940552 or http://dx.doi.org/10.2139/ssrn.940552

John Fender (Contact Author)

University of Birmingham - Department of Economics ( email )

Economics Department
Birmingham, B15 2TT
United Kingdom

Neil Rankin

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom
(44 1203) 523 470 (Phone)
(44 1203) 523 032 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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