Managing Currency Pegs

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Abstract:

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 prudential, whereas first-best solutions are not.

Document Type: Research Article

DOI: http://dx.doi.org/10.1257/aer.102.3.192

Publication date: May 1, 2012

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