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Title: Managing Currency Pegs

Author(s): Stephanie Schmitt-Grohé and Martín Uribe

Publication Date: May 2012

Keyword(s): capital controls, Currency pegs, downward nominal wage rigidity and pecuniary externality.

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Schmitt-Grohé, S and Uribe, M. 2012. 'Managing Currency Pegs'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8983