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Fixed exchange rates and sticky prices in emerging markets

✍ Scribed by William Miles

Publisher
John Wiley and Sons
Year
2003
Tongue
English
Weight
91 KB
Volume
15
Category
Article
ISSN
0954-1748

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✦ Synopsis

Abstract

In the wake of financial crises in emerging markets, firmly fixed exchange rates and even dollarization have been advocated as a means to decrease vulnerability. There are many important new issues related to fixing the exchange rate and financial vulnerability, but one long‐time vital concern for a fixed currency regime persists: the flexibility of domestic prices and wages. In the presence of high nominal rigidities, fixed rates can lead to large output costs in the aftermath of negative macroeconomic shocks. Employing a method previously applied to the gold standard fixed rate regime, we find generally flat aggregate supply curves in a sample of five emerging markets. This indicates substantial inflexibility of prices, and large losses in terms of income and employment in a fixed exchange rate regime subsequent to negative shocks. Β© 2003 John Wiley & Sons, Ltd.

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