Working Paper: CEPR ID: DP1692
Authors: Sergio Rebelo
Abstract: There is a well-known set of empirical regularities that describe the experience of countries that peg their exchange rate as part of a macroeconomic adjustment programme. Following-the-peg economies tend to experience an increase in GDP, a large expansion of production in the non-tradable sector, a contraction in tradables production, a current account deterioration, an increase in the real wage, a reduction in unemployment, a sharp appreciation in the relative price of non-tradables and a boom in the real estate market. This paper discusses how the changes in the expected behaviour of fiscal policy that tend to be associated with the peg can contribute to explaining these facts.
Keywords: fixed exchange rates; macroeconomic stabilization; real exchange rate; fiscal policy
JEL Codes: F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| pegging exchange rate (F31) | increase in GDP (E20) |
| increase in GDP (E20) | improvement in fiscal discipline (E62) |
| improvement in fiscal discipline (E62) | enhancement of private sector productivity (O49) |
| pegging exchange rate (F31) | expansion of non-tradable sector (F19) |
| pegging exchange rate (F31) | contraction in tradables production (F16) |
| pegging exchange rate (F31) | current account deterioration (F32) |
| pegging exchange rate (F31) | real wage increases (J39) |
| pegging exchange rate (F31) | boom in real estate market (R31) |
| pegging exchange rate (F31) | appreciation of relative price of non-tradables (F16) |