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Fixed exchange rates and sticky prices in emerging markets

  • William Miles

    (Department of Economics, Wichita State University, Wichita, USA)

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    In the wake of financial crises in emerging markets, firmly fixed exchange rates and even dollarization have been advocated as a means to decrease vulnerability. There are many important new issues related to fixing the exchange rate and financial vulnerability, but one long-time vital concern for a fixed currency regime persists: the flexibility of domestic prices and wages. In the presence of high nominal rigidities, fixed rates can lead to large output costs in the aftermath of negative macroeconomic shocks. Employing a method previously applied to the gold standard fixed rate regime, we find generally flat aggregate supply curves in a sample of five emerging markets. This indicates substantial inflexibility of prices, and large losses in terms of income and employment in a fixed exchange rate regime subsequent to negative shocks. © 2003 John Wiley & Sons, Ltd.

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    File URL: http://hdl.handle.net/10.1002/jid.1005
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    Article provided by John Wiley & Sons, Ltd. in its journal Journal of International Development.

    Volume (Year): 15 (2003)
    Issue (Month): 5 ()
    Pages: 575-586

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    Handle: RePEc:wly:jintdv:v:15:y:2003:i:5:p:575-586
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