DP8983 Managing Currency Pegs
|Author(s):||Stephanie Schmitt-Grohé, Martín Uribe|
|Publication Date:||May 2012|
|Keyword(s):||capital controls, Currency pegs, downward nominal wage rigidity, pecuniary externality.|
|JEL(s):||E31, E62, F41|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=8983|
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.