Optimal adjustment paths in a monetary union

Ansgar Belke and Daniel Gros

No 201604, ROME Working Papers from ROME Network

Abstract: Adjustment to an external imbalance is more difficult 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 higher current account deficits 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)
Pages: 26 pages
Date: 2016-04
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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)
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