Managing Currency Pegs

Stephanie Schmitt-Grohe and Martín Uribe ()

American Economic Review, 2012, vol. 102, issue 3, 192-97

Abstract: 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.

Date: 2012
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Working Paper: Managing Currency Pegs (2012)
Working Paper: Managing Currency Pegs (2012)
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