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Output Divergence in Fixed Exchange Rate Regimes

Author

Listed:
  • Yao Chen

    (Erasmus University Rotterdam)

  • Felix Ward

    (Erasmus University Rotterdam)

Abstract

This paper presents empirical evidence for the violation of nominal exchange regime neutrality. We find that fixing the exchange rate is associated with real output losses among countries with a high pre-peg inflation rate. In particular, ten years after fixing the exchange rate a country with a +1 percentage point (ppt) pre-peg wage inflation differential has a 2% lower real GDP per capita level and a 1% lower TFP level. The tradable sector is more affected than the non-tradable sector, which accords with the former’s greater exposure to international arbitrage.

Suggested Citation

  • Yao Chen & Felix Ward, 2022. "Output Divergence in Fixed Exchange Rate Regimes," Tinbergen Institute Discussion Papers 22-031/VI, Tinbergen Institute, revised 22 May 2025.
    • Handle: RePEc:tin:wpaper:20220031
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    References listed on IDEAS

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    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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