Prudential Policy For Peggers
نویسندگان
چکیده
This paper shows that in a small open economy with downward nominal wage rigidity pegging the nominal exchange rate creates a pecuniary externality. The externality causes unemployment, overborrowing, and depressed consumption. Ramsey optimal capital controls are shown to be prudential in the sense that they tax capital inflows in good times and subsidize external borrowing in bad times. Under plausible calibrations, this type of macro prudential policy is shown to lower the average unemployment rate by 10 percentage points, to reduce average external debt by 10 to 50 percent, and to increase welfare by 2 to 5 percent of consumption per period. JEL Classifications: F41, E31, E62.
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