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Fixed on Flexible Rethinking Exchange Rate Regimes after the Great Recession

Giancarlo Corsetti (), Keith Kuester and Gernot Müller

No 1721, Discussion Papers from Centre for Macroeconomics (CFM)

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 oat 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: 2017-07
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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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