Fixed on Flexible: Rethinking Exchange Rate Regimes after the Great Recession

Müller, Gernot, Giancarlo Corsetti and Keith Kuester
Authors registered in the RePEc Author Service: Gernot J. Müller

No 12197, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The zero lower bound problem during the Great Recession has exposed the limits of monetary autonomy, prompting a reevaluation of the relative benefits of currency pegs and monetary unions (see e.g. Cook and Devereux, 2016). We revisit this issue from the perspective of a small open economy. While a peg can be beneficial when the recession originates domestically, we show that a float dominates in the face of deflationary demand shocks abroad. When the rest of the world is in a liquidity trap, the domestic currency depreciates in nominal and real terms even in the absence of domestic monetary stimulus (if domestic rates are also at the zero lower bound) -- enhancing the country's competitiveness and insulating to some extent the domestic economy from foreign deflationary pressure.

Keywords: External shock; Great recession; exchange rate; Zero lower bound; Exchange rate peg; Fiscal multiplier; Benign coincidence; Currency union (search for similar items in EconPapers)
JEL-codes: E31 F41 F42 (search for similar items in EconPapers)
Date: 2017-08
New Economics Papers: this item is included in nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Journal Article: Fixed on Flexible: Rethinking Exchange Rate Regimes after the Great Recession (2017)
Working Paper: Fixed on Flexible Rethinking Exchange Rate Regimes after the Great Recession (2017)
Working Paper: Fixed on Flexible Rethinking Exchange Rate Regimes after the Great Recession (2017)
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