NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Pegs, Downward Wage Rigidity, and Unemployment: The Role of Financial Structure

Stephanie Schmitt-Grohé, Martín Uribe

NBER Working Paper No. 18223
Issued in July 2012
NBER Program(s):   IFM

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.

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Document Object Identifier (DOI): 10.3386/w18223

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