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Disinflation in an Open-Economy Staggered-Wage DGE Model: Exchange-Rate Pegging, Booms and the Role of Preannouncement

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Author Info
John Fender ()
Neil Rankin ()

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Abstract

A 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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Publisher Info
Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 0610.

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Date of creation: Oct 2006
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Handle: RePEc:san:cdmawp:0610

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Related research
Keywords: 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

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  1. Ascari, Guido & Rankin, Neil, 2002. "Staggered wages and output dynamics under disinflation," Journal of Economic Dynamics and Control, Elsevier, vol. 26(4), pages 653-680, April. [Downloadable!] (restricted)
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  2. Ball, Laurence, 1994. "Credible Disinflation with Staggered Price-Setting," American Economic Review, American Economic Association, vol. 84(1), pages 282-89, March. [Downloadable!] (restricted)
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  3. Ascari, Guido, 2000. "Optimising Agents, Staggered Wages and Persistence in the Real Effects of Money Shocks," Economic Journal, Royal Economic Society, vol. 110(465), pages 664-86, July. [Downloadable!] (restricted)
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  4. Ascari, Guido, 1998. "Superneutrality Of Money In Staggered Wage-Setting Models," Macroeconomic Dynamics, Cambridge University Press, vol. 2(03), pages 383-400, September. [Downloadable!]
  5. De Gregorio, Jose & Guidotti, Pablo E & Vegh, Carlos A, 1998. "Inflation Stabilisation and the Consumption of Durable Goods," Economic Journal, Royal Economic Society, vol. 108(446), pages 105-31, January. [Downloadable!] (restricted)
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  6. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December. [Downloadable!] (restricted)
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