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Deciphering the macroeconomic effects of internal devaluations in a monetary union

Author

Listed:
  • Javier Andrés

    (Universidad de Valencia)

  • Óscar Arce

    (Banco de España)

  • Samuel Hurtado

    (Banco de España)

  • Jesús Fernández-Villaverde

    (University of Pennsylvania, NBER, and CEPR)

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.

Suggested Citation

  • Javier Andrés & Óscar Arce & Samuel Hurtado & Jesús Fernández-Villaverde, 2020. "Deciphering the macroeconomic effects of internal devaluations in a monetary union," Working Papers 2016, Banco de España.
  • Handle: RePEc:bde:wpaper:2016
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    monetary union; internal devaluation; structural reforms; zero lower bound; policy sequencing;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly

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