Output divergence in fixed exchange rate regimes

Yao Chen and Felix Ward

Journal of International Economics, 2025, vol. 157, issue C

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.

Keywords: Nominal exchange regime neutrality; Open economy; Nominal frictions (search for similar items in EconPapers)
JEL-codes: E50 F40 O30 O47 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:157:y:2025:i:c:s0022199625000716

DOI: 10.1016/j.jinteco.2025.104115

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