Working Paper: NBER ID: w18223
Authors: Stephanie Schmitt-Grohe; MartÃn Uribe
Abstract: 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.
Keywords: fixed exchange rate; downward wage rigidity; unemployment; financial structure
JEL Codes: F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| negative external shocks + downward nominal wage rigidity + currency peg (F31) | involuntary unemployment (J64) |
| financial structure (open vs. closed capital account) (F32) | welfare outcomes of pegging (I38) |
| pegging currency (F31) | welfare costs (I30) |