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Faculty of Economics

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Corsetti, C., Kuester, K. and Müller, G. J.

Fixed on Flexible Rethinking Exchange Rate Regimes after the Great Recession

IMF Economic Review

Abstract: The zero lower bound problem during the Great Recession has exposed the limits of monetary autonomy, prompting a reevaluation of the relative bene ts of currency pegs and monetary unions (see e.g. Cook and Devereux (2016)). We revisit this issue from the perspective of a small open economy. While a peg can be bene cial when the recession originates domestically, we show that a oat dominates in the face of low global demand and de ationary pressures from abroad. Even in the absence of domestic monetary stimulus (with rates at the zero lower bound), the domestic currency depreciates in nominal and real terms, enhancing the country's competitiveness and insulating to some extent the domestic economy from foreign de ation.

Keywords: External shock, Great Recession, Exchange rate, Zero lower bound, Exchange rate peg, Currency union, Fiscal Multiplier, Benign coincidence

JEL Codes: F41, F42, E31

Author links: Giancarlo Corsetti  

Publisher's Link:

Cambridge Working Paper in Economics Version of Paper: Fixed on Flexible Rethinking Exchange Rate Regimes after the Great Recession, Corsetti, G., Kuester, K. and Müller, G. J., (2017)

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