TY - JOUR
T1 - A Further Contribution towards Explaining Why Disinflation through Currency Pegging May Cause a Boom
AU - Fender, J.
AU - Rankin, N.
N1 - M1 - 3
PY - 2011/4
Y1 - 2011/4
N2 - We revisit the question of why exchange-rate-based (ERB) disinflation is often expansionary. We use an analytical DGE model in discrete time with staggered wages. If the policy is unanticipated, and if the currency is pegged at the level it would have reached under unchanged policies, then a boom occurs. For preannounced ERB disinflation, our model also predicts a boom. The explanation for both is that when wages are staggered, wage-setters have to be forward-looking. Anticipating lower future inflation, they reduce wages before the change in the exchange rate, causing a favourable supply-side effect on output.
AB - We revisit the question of why exchange-rate-based (ERB) disinflation is often expansionary. We use an analytical DGE model in discrete time with staggered wages. If the policy is unanticipated, and if the currency is pegged at the level it would have reached under unchanged policies, then a boom occurs. For preannounced ERB disinflation, our model also predicts a boom. The explanation for both is that when wages are staggered, wage-setters have to be forward-looking. Anticipating lower future inflation, they reduce wages before the change in the exchange rate, causing a favourable supply-side effect on output.
UR - http://www.scopus.com/inward/record.url?scp=79952197557&partnerID=8YFLogxK
U2 - 10.1016/j.jimonfin.2011.01.003
DO - 10.1016/j.jimonfin.2011.01.003
M3 - Article
SN - 0261-5606
VL - 30
SP - 516
EP - 536
JO - Journal of International Money and Finance
JF - Journal of International Money and Finance
IS - 3
ER -