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

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  • Stephanie Schmitt-Grohé
  • Martín Uribe

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. The paper presents two surprising results. First, a pegging economy might be better off with a closed than with an open capital account. Second, the welfare gain from switching from a peg to the optimal (full-employment) monetary policy might be larger in financially open economies than in financially closed ones.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18223.

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Date of creation: Jul 2012
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Handle: RePEc:nbr:nberwo:18223

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Cited by:
  1. Roger E. A. Farmer, 2012. "The Evolution of Endogenous Business Cycles," Working Papers 302012, Hong Kong Institute for Monetary Research.

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