Disinflation in an Open-Economy Staggered-Wage DGE Model: Exchange-Rate Pegging, Booms and the Role of Preannouncement
AbstractA dynamic general equilibrium model of an open economy with staggered wages is constructed. We analyse disinflation through pegging the exchange rate. In accordance with the stylised facts, an initial boom in output can result, depending on the exact level of the peg. The reason is an element of preannouncement in the policy. Disinflation through reducing monetary growth is shown to be equivalent to disinflation through pegging the exchange rate, if the latter includes an initial currency revaluation. This helps explain why such disinflation causes a short-run slump. The model can also help explain inflation persistence.
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Date of creation: Oct 2006
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Exchange-rate-based disinflation; money-based disinflation; staggered wages; preannouncement effects.;
Find related papers by JEL classification:
- F52 - International Economics - - International Relations and International Political Economy - - - National Security; Economic Nationalism
- E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-11-04 (All new papers)
- NEP-CBA-2006-11-04 (Central Banking)
- NEP-DGE-2006-11-04 (Dynamic General Equilibrium)
- NEP-MAC-2006-11-04 (Macroeconomics)
- NEP-MON-2006-11-04 (Monetary Economics)
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