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Managing Currency Pegs

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  • Stephanie Schmitt-Grohe
  • Martin Uribe
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    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.

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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.3.192
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    Bibliographic Info

    Article provided by American Economic Association in its journal American Economic Review.

    Volume (Year): 102 (2012)
    Issue (Month): 3 (May)
    Pages: 192-97

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    Handle: RePEc:aea:aecrev:v:102:y:2012:i:3:p:192-97

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    References

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    1. Uribe, Martin, 1997. "Exchange-rate-based inflation stabilization: The initial real effects of credible plans," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 197-221, July.
    2. Calvo, Guillermo A, 1986. "Temporary Stabilization: Predetermined Exchange Rates," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1319-29, December.
    3. Amartya Lahiri, 1996. "Exchange Rate Based Stabilizations Under Real Frictions: The role of endagenous labor supply," UCLA Economics Working Papers 759, UCLA Department of Economics.
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    Cited by:
    1. De Paoli, Bianca & Lipinska, Anna, 2012. "Capital controls: a normative analysis," Proceedings, Federal Reserve Bank of San Francisco, issue Nov, pages 1-36.

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