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Fixed on Flexible Rethinking Exchange Rate Regimes after the Great Recession

Giancarlo Corsetti (), Keith Kuester and Gernot Müller

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: The zero lower bound problem during the Great Recession has exposed the limits of monetary autonomy, prompting a re-evaluation of the relative benefits of currency pegs and monetary unions (see e.g. Cook and Devereux, 2016). We revisit this issue from the perspective of a small open economy. While a peg can be beneficial when the recession originates domestically, we show that a float dominates in the face of deflationary demand shocks abroad. When the rest of the world is in a liquidity trap, the domestic currency depreciates in nominal and real terms even in the absence of domestic monetary stimulus (if domestic rates are also at the zero lower bound) - enhancing the country's competitiveness and insulating to some extent the domestic economy from foreign deflationary pressure.

Keywords: External shock; Great Recession; Exchange rate; Zero lower bound; Exchange rate peg; Currency union; Fiscal Multiplier; Benign coincidence (search for similar items in EconPapers)
JEL-codes: F41 F42 E31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac, nep-mon and nep-opm
Date: 2017-08-17
Note: gc422
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Citations: View citations in EconPapers (5) Track citations by RSS feed

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Journal Article: Fixed on Flexible: Rethinking Exchange Rate Regimes after the Great Recession (2017) Downloads
Working Paper: Fixed on Flexible Rethinking Exchange Rate Regimes after the Great Recession (2017) Downloads
Working Paper: Fixed on Flexible: Rethinking Exchange Rate Regimes after the Great Recession (2017) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:1729

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