Prudential Policy for Peggers
AbstractThis paper shows that in a small open economy model with downward nominal wage rigidity pegging the nominal exchange rate creates a negative pecuniary externality. This peg-induced externality is shown to cause unemployment, overborrowing, and depressed levels of consumption. The paper characterizes the optimal capital control policy in this model and shows that it is prudential in nature. For it restricts capital inflows in good times and subsidizes external borrowing in bad times. Under plausible calibrations of the model, this type of macro prudential policy is shown to lower the average unemployment rate by 10 percentage points, reduce average external debt by more than 50 percent, and increase welfare by over 7 percent of consumption per period.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18031.
Date of creation: May 2012
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Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-15 (All new papers)
- NEP-CBA-2012-05-15 (Central Banking)
- NEP-MAC-2012-05-15 (Macroeconomics)
- NEP-MON-2012-05-15 (Monetary Economics)
- NEP-OPM-2012-05-15 (Open Economy Macroeconomic)
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- Olivier Jeanne, 2014.
"Macroprudential Policies in a Global Perspective,"
NBER Working Papers
19967, National Bureau of Economic Research, Inc.
- Gianluca Benigno & Luca Fornaro, 2014.
"The Financial Resource Curse,"
Scandinavian Journal of Economics,
Wiley Blackwell, vol. 116(1), pages 58-86, 01.
- Gianluca Benigno & Luca Fornaro, 2013. "The Financial Resource Curse," CEP Discussion Papers dp1217, Centre for Economic Performance, LSE.
- Benigno, Gianluca & Fornaro, Luca, 2013. "The Financial Resource Curse," CEPR Discussion Papers 9489, C.E.P.R. Discussion Papers.
- Gianluca Benigno & Luca Fornaro, 2013. "The financial resource curse," LSE Research Online Documents on Economics 51557, London School of Economics and Political Science, LSE Library.
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