Prudential Policy for Peggers

Martín Uribe () and Schmitt-Grohé, Stephanie
Authors registered in the RePEc Author Service: Stephanie Schmitt-Grohe

No 8961, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper shows that in a small open economy model with downward nominal wage rigidity pegging the nominal exchange rate creates a negative pecuniary externality. This peg-induced externality is shown to cause unemployment, overborrowing, and depressed levels of consumption. The paper characterizes the optimal capital control policy and shows that it is prudential in nature. For it restricts capital inflows in good times and subsidizes external borrowing in bad times. Under plausible calibrations of the model, this type of macro prudential policy is shown to lower the average unemployment rate by 10 percentage points, reduce average external debt by more than 50 percent, and increase welfare by over 7 percent of consumption per period.

Keywords: Capital controls; Currency pegs; Downward wage rigidity; Pecuniary externality (search for similar items in EconPapers)
JEL-codes: E31 E62 F41 (search for similar items in EconPapers)
Date: 2012-05
New Economics Papers: this item is included in nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (54)

Downloads: (external link)
https://cepr.org/publications/DP8961 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Prudential Policy for Peggers (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:8961

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP8961

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().