Bulletin n. 2-3/2012 | ||
October 2012-February 2013 | ||
Schmitt-Grohé Stephanie, Uribe Martín |
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Managing Currency Pegs | ||
in American Economic Review , Vol. 102, No. 3, May 2012 , 2012 , 192–97 | ||
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. | ||