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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.

Suggested Citation

  • Stephanie Schmitt-Grohé & Martín Uribe, 2012. "Pegs, Downward Wage Rigidity, and Unemployment: The Role of Financial Structure," NBER Working Papers 18223, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18223 Note: IFM
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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. Jordan Roulleau-Pasdeloup, 2016. "The Government Spending Multiplier in a Deep Recession," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 16.22, Université de Lausanne, Faculté des HEC, DEEP.

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    JEL classification:

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

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