Downward Nominal Wage Rigidity Currency Pegs And Involuntary Unemployment

  title={Downward Nominal Wage Rigidity Currency Pegs And Involuntary Unemployment},
  author={Stephanie Schmitt - Groh{\'e} Mart́ın Uribe},
  • Stephanie Schmitt - Grohé Mart́ın Uribe
  • Published 2016
This paper analyzes the inefficiencies that arise from the combination of a fixed exchange rate, nominal rigidities, and free capital mobility. We document that nominal wages are downwardly rigid in emerging countries. Motivated by this evidence, we develop a dynamic stochastic model of a small open economy that incorporates this nominal friction. The model predicts that currency pegs cause average rates of unemployment that are increasing in the variance of the underlying shocks. Under… CONTINUE READING
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