Managing Currency Pegs
NBER Working Paper No. 18092
The combination of a fixed exchange rate and downward nominal wage rigidity creates a real rigidity. In turn, this real rigidity makes the economy prone to involuntary unemployment during external crises. This paper presents a graphical analysis of alternative policy strategies aimed at mitigating this source of inefficiency. First- and second-best monetary and fiscal solutions are analyzed. Second-best solutions are found to be prudential, whereas first-best solutions are not.
Document Object Identifier (DOI): 10.3386/w18092
Published: “Managing Currency Pegs,” (with Mart´ın Uribe), American Economic Review: Papers & Pro- ceedings 102, May 2012, 192-197.
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