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Managing Currency Pegs

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  • Schmitt-Grohé, Stephanie
  • Uribe, Martín
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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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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8983.

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    Date of creation: May 2012
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    Handle: RePEc:cpr:ceprdp:8983

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    Related research

    Keywords: capital controls; Currency pegs; downward nominal wage rigidity; pecuniary externality.;

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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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