Optimal adjustment paths in a monetary union

Ansgar Belke and Daniel Gros

No 623, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

Abstract: Adjustment to an external imbalance is more diffi cult within a monetary union if wages are sticky. Periods of high unemployment are usually necessary to achieve the required real depreciation (internal devaluation). Gradual adjustment is usually recommended to distribute the output and employment cost over time. This paper takes into account that gradual adjustment also has a cost in terms of higher current account defi cits and thus a higher debt, and ultimately higher debt service costs. We calculate the optimal path/speed of price and wage adjustment in terms of deeper parameters like the slope of the Phillips curve, the degree of openness, etc. Gradual adjustment is not always optimal.

Keywords: speed of adjustment; price and wage adjustment; internal devaluation; policy complementarities (search for similar items in EconPapers)
JEL-codes: F41 F45 P11 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-cse and nep-opm
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Optimal adjustment paths in a monetary union (2017)
Working Paper: Optimal Adjustment Paths in a Monetary Union (2017)
Working Paper: Optimal adjustment paths in a monetary union (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:rwirep:623

DOI: 10.4419/86788725

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