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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. Two surprising results are obtained. First, that a pegging economy might be better off with a closed capital account than with an open one. Second, that the welfare gain from switching from a peg to the optimal (full-employment) monetary policy might be greater in financially open economies than in financially closed ones.

Suggested Citation

  • Stephanie Schmitt-Grohé & Martín Uribe, 2012. "Pegs, Downward Wage Rigidity, and Unemployment: the Role of Financial Structure," Working Papers Central Bank of Chile 672, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:672
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    References listed on IDEAS

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    1. Jonathan D. Ostry & Carmen M. Reinhart, 1992. "Private Saving and Terms of Trade Shocks: Evidence from Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 495-517, September.
    2. Carlos Medel, 2012. "¿Akaike o Schwarz? ¿Cuál elegir para Predecir el PIB Chileno?," Working Papers Central Bank of Chile 658, Central Bank of Chile.
    3. Macarena García & Alberto Naudon, 2012. "Dinámica Laboral en Chile," Working Papers Central Bank of Chile 659, Central Bank of Chile.
    4. Uribe, Martin, 1997. "Exchange-rate-based inflation stabilization: The initial real effects of credible plans," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 197-221, July.
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    Cited by:

    1. Farmer, Roger E.A., 2016. "The Evolution Of Endogenous Business Cycles," Macroeconomic Dynamics, Cambridge University Press, vol. 20(02), pages 544-557, March.
    2. repec:chb:bcchec:v:18:y:2015:i:1:p:50-66 is not listed on IDEAS
    3. repec:eee:inecon:v:116:y:2019:i:c:p:1-32 is not listed on IDEAS
    4. Miguel Fuentes D. & Claudio E. Raddatz K. & Carmen María Reinhart., 2015. "Capital mobility and monetary policy: an overview," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 18(1), pages 50-66, April.
    5. Jordan Roulleau-Pasdeloup, 2016. "The Government Spending Multiplier in a Deep Recession," Cahiers de Recherches Economiques du Département d'économie 16.22, Université de Lausanne, Faculté des HEC, Département d’économie.

    More about this item

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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