Fixed exchange rates and sticky prices in emerging markets

William Miles
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William Miles: Department of Economics, Wichita State University, Wichita, USA, Postal: Department of Economics, Wichita State University, Wichita, USA

Journal of International Development, 2003, vol. 15, issue 5, 575-586

Abstract: In the wake of financial crises in emerging markets, firmly fixed exchange rates and even dollarization have been advocated as a means to decrease vulnerability. There are many important new issues related to fixing the exchange rate and financial vulnerability, but one long-time vital concern for a fixed currency regime persists: the flexibility of domestic prices and wages. In the presence of high nominal rigidities, fixed rates can lead to large output costs in the aftermath of negative macroeconomic shocks. Employing a method previously applied to the gold standard fixed rate regime, we find generally flat aggregate supply curves in a sample of five emerging markets. This indicates substantial inflexibility of prices, and large losses in terms of income and employment in a fixed exchange rate regime subsequent to negative shocks. © 2003 John Wiley & Sons, Ltd.

Date: 2003
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jintdv:v:15:y:2003:i:5:p:575-586

DOI: 10.1002/jid.1005

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