DP1692 What Happens When Countries Peg Their Exchange Rates? (The Real Side of Monetary Reforms)

Author(s): Sérgio Rebelo
Publication Date: August 1997
Keyword(s): Fiscal Policy, Fixed Exchange Rates, Macroeconomic Stabilization, Real Exchange Rate
JEL(s): F41
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1692

There is a well-known set of empirical regularities that describe the experience of countries that peg their exchange rate as part of a macroeconomic adjustment programme. Following-the-peg economies tend to experience an increase in GDP, a large expansion of production in the non-tradable sector, a contraction in tradables production, a current account deterioration, an increase in the real wage, a reduction in unemployment, a sharp appreciation in the relative price of non-tradables and a boom in the real estate market. This paper discusses how the changes in the expected behaviour of fiscal policy that tend to be associated with the peg can contribute to explaining these facts.