Output Divergence in Fixed Exchange Rate Regimes

Yao Chen and Felix Ward

No 17902, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper presents empirical evidence for the violation of nominal exchange regime neutrality. We find that fixing the exchange rate is associated with real output losses among countries with a high pre-peg inflation rate. In particular, ten years after fixing the exchange rate a country with a +1 percentage point (ppt) pre-peg wage inflation differential has a 2% lower real GDP per capita level and a 1% lower TFP level. The tradable sector is more affected than the non-tradable sector, which accords with the former’s greater exposure to international arbitrage.

JEL-codes: E50 F31 O40 (search for similar items in EconPapers)
Date: 2023-02
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