Pegs, Downward Wage Rigidity, and Unemployment: The Role of Financial Structure
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.
Prepared for the FIFTEENTH ANNUAL CONFERENCE OF THE CENTRAL BANK OF CHILE, on "Capital Mobility and Monetary Policy" held November 17-18 , 2011 in Santiago, Chile. We thank Andy Neumeyer and the editors, Carmen Reinhart and Miguel Fuentes for helpful comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
“Pegs, Downward Wage Rigidity, and Unemployment: The Role of Financial Structure” (with Stephanie Schmitt-Groh´e), in Capital Mobility and Monetary Policy, edited by Miguel Fuentes D., Claudio E. Raddatz, Carmen M. Reinhart, Central Bank of Chile, Santiago, Chile, 2014, 69-95.