The role of internal devaluation in correcting external deficits: The case of Spain

Paloma Villanueva, Luis Cardenas del Rey, Jorge Uxó and Ignacio Alvarez ()

Structural Change and Economic Dynamics, 2020, vol. 54, issue C, 282-296

Abstract: This paper carries out an ex-post evaluation of the internal devaluation policy in correcting external deficits. We examine to what extent and through which mechanisms the internal devaluation strategy implemented after 2010 is responsible for the readjustment in net exports in the case of Spain. Our analysis incorporates the effects linked to changes in external competitiveness and domestic prices and those associated with changes in income distribution. The main way in which internal devaluation contributed to external readjustment was through a decrease in domestic demand and imports rather than through enhanced external competitiveness. These demand effects derived from the distributive impact of changes in unit labor costs, which reduced the Spanish wage share during this period. According to our estimates, internal devaluation explains 33% of total external sector readjustment over the 2010-2018 period, 98% of which is driven by the demand effect, with the remaining 2% resulting from price effects.

Keywords: Spanish current account; Wage share; Price-cost competitiveness; Internal devaluation; Bhaduri-Marglin (search for similar items in EconPapers)
JEL-codes: E12 E25 F32 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:streco:v:54:y:2020:i:c:p:282-296

DOI: 10.1016/j.strueco.2020.03.008

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