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  3. American Economic Review
  4. May 2012
  5. Managing Currency Pegs

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Managing Currency Pegs

  • Stephanie Schmitt-Grohé
  • Martín Uribe
American Economic Review
vol. 102, no. 3, May 2012
(pp. 192–97)
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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.

Citation

Schmitt-Grohé, Stephanie, and Martín Uribe. 2012. "Managing Currency Pegs." American Economic Review, 102 (3): 192–97. DOI: 10.1257/aer.102.3.192

JEL Classification

  • F33 International Monetary Arrangements and Institutions
  • E52 Monetary Policy