Discussion paper

DP8983 Managing Currency Pegs

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.


Uribe, M and S Schmitt-Grohé (2012), ‘DP8983 Managing Currency Pegs‘, CEPR Discussion Paper No. 8983. CEPR Press, Paris & London. https://cepr.org/publications/dp8983