Abstract
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. (C) 2011 Elsevier Ltd. All rights reserved.
Original language | English |
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Pages (from-to) | 516-536 |
Number of pages | 21 |
Journal | Journal of International Money and Finance |
Volume | 30 |
Issue number | 3 |
DOIs | |
Publication status | Published - 1 Apr 2011 |
Keywords
- Staggered wages
- Preannouncement
- Money-based disinflation
- Exchange-rate-based disinflation