Internal Devaluations and Equilibrium Exchange Rates: new evidences and perspectives for the EMU

Jamel Saadaoui

Applied Economics, 2018, vol. 50, issue 59, 6364-6381

Abstract: From the onset of the euro crisis to the Brexit vote, we have witnessed impressive reductions of current account imbalances in peripheral countries of the euro area. These reductions can be the result of either a compression of internal demand or an improvement in external competitiveness. In this paper, we compute exchange rate misalignments within the euro area to assess whether peripheral countries have managed to improve their external competitiveness. After controlling for the reduction of business cycle synchronization within the EMU, we find that peripheral countries have managed to reduce their exchange rate misalignments thanks to internal devaluations. To some extent, these favourable evolutions reflect improvements in external competitiveness. Nevertheless, these gains could only be temporary if peripheral countries do not improve their non-price competitiveness, their trade structures and their international specializations in the long run.Abbreviations: EMU, European Monetary Union; FEER, Fundamental Equilibrium Exchange Rate; SMIM, Symmetric Matrix Inversion Method; BEER, Behavioural Equilibrium Exchange Rate; PPP, Purchasing Parity Power; OCI, Own Country Included; IMF, International Monetary Fund; OECD, Organisation for Economic Co-operation and Development; NIESR, National Institute of Economic and Social Research.

Date: 2018
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Working Paper: INTERNAL DEVALUATIONS AND EQUILIBRIUM EXCHANGE RATES: NEW EVIDENCES AND PERSPECTIVES FOR THE EMU (2017)
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DOI: 10.1080/00036846.2018.1486019

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