The Cost of a Currency Peg during the Great Recession

Thomas Barnebeck Andersen*

*Corresponding author for this work

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Abstract

Over the last decade economists have debated whether a country’s exchange rate regime explains how it weathered the Great Recession. As Denmark is the only OECD country with a conventional currency peg, its experience brings unique perspective to the debate. After the collapse of Lehman Brothers in the fall of 2008, the Danish central bank raised the policy rate to defend the euro peg. The spread to the euro area was not normalized until the summer of 2009. Using the synthetic control method, I ask whether Denmark performed worse during 2009-2018 than the synthetic doppelganger, where the doppelganger is made up of comparable OECD countries with flexible exchange rates. I find that Danish real GDP per capita as a percentage of doppelganger ditto has on average been around 95%to98%. Results are consistent across different specifications and samples.

Original languageEnglish
JournalOpen Economies Review
Volume34
Issue number2
Pages (from-to)255-279
ISSN0923-7992
DOIs
Publication statusPublished - Apr 2023

Bibliographical note

Publisher Copyright:
© 2022, The Author(s), under exclusive licence to Springer Science+Business Media, LLC, part of Springer Nature.

Keywords

  • Currency peg
  • Exchange rate regime
  • Great Recession
  • Synthetic control method

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