Fixed exchange rates and sticky Prices in emerging markets

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Authors
Miles, William
Issue Date
2003-06-23
Type
Article
Language
en_US
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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.

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Citation
Miles, W. (2003), Fixed exchange rates and sticky prices in emerging markets. J. Int. Dev., 15: 575-586
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John Wiley & Sons, Ltd.
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ISSN
1099-1328
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