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Pegs, Downward Wage Rigidity, and Unemployment: the Role of Financial Structure

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  • Stephanie Schmitt-Grohé
  • Martín Uribe
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    Abstract

    This paper studies the relationship between financial structure and the welfare consequences of fixed exchange rate regimes in small open emerging economies with downward nominal wage rigidity. Two surprising results are obtained. First, that a pegging economy might be better off with a closed capital account than with an open one. Second, that the welfare gain from switching from a peg to the optimal (full-employment) monetary policy might be greater in financially open economies than in financially closed ones.

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    File URL: http://www.bcentral.cl/estudios/documentos-trabajo/pdf/dtbc672.pdf
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    Bibliographic Info

    Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 672.

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    Date of creation: Jul 2012
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    Handle: RePEc:chb:bcchwp:672

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    1. Carlos Medel, 2012. "¿Akaike o Schwarz? ¿Cuál elegir para Predecir el PIB Chileno?," Working Papers Central Bank of Chile 658, Central Bank of Chile.
    2. Macarena García & Alberto Naudon, 2012. "Dinámica Laboral en Chile," Working Papers Central Bank of Chile 659, Central Bank of Chile.
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