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American Economic Review: Vol. 102 No. 3 (May 2012)


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Managing Currency Pegs

Article 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


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.

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Schmitt-Grohé, Stephanie (Columbia U)
Uribe, Martín (Columbia U)

JEL Classifications

F33: International Monetary Arrangements and Institutions
E52: Monetary Policy

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