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Deciphering the macroeconomic effects of internal devaluations in a monetary union

Javier Andrés (), Óscar Arce (), Samuel Hurtado () and Jesus Fernandez-Villaverde ()
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Óscar Arce: Banco de España

No 2016, Working Papers from Banco de España

Abstract: We study the macroeconomic effects of internal devaluations undertaken by a periphery of countries belonging to a monetary union. We find that internal devaluations have large and positive output effects in the long run. Through an expectations channel, most of these effects carry over to the short run. Internal devaluations focused on goods markets reforms are generally more powerful in stimulating growth than reforms aimed at moderating wages, but the latter are less deflationary. For a monetary union with a periphery the size of the euro area’s, the countries at the periphery benefit from internal devaluations even at the zero lower bound (ZLB) of the nominal interest rate. Nevertheless, when the ZLB binds, there is a case for a sequencing of reforms that prioritizes labor policies over goods markets reforms.

Keywords: monetary union; internal devaluation; structural reforms; zero lower bound; policy sequencing (search for similar items in EconPapers)
JEL-codes: D42 E44 E63 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2020-06
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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https://www.bde.es/f/webbde/SES/Secciones/Publicac ... 20/Files/dt2016e.pdf First version, June 2020 (application/pdf)

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Working Paper: Deciphering the Macroeconomic Effects of Internal Devaluations in a Monetary Union (2020) Downloads
Working Paper: Deciphering the Macroeconomic Effects of Internal Devaluations in a Monetary Union (2020) Downloads
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