Internal Devaluations and Equilibrium Exchange Rates: New Evidences and Perspectives for the EMU

3rd International Workshop on Financial Markets and Nonlinear Dynamics

Applied Economics, 50:59, 6364-6381, DOI: 10.1080/00036846.2018.1486019

31 Pages Posted: 15 Jun 2017 Last revised: 25 May 2019

Date Written: November 11, 2017

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.

Keywords: Internal Devaluation, Equilibrium Exchange Rate, External Competitiveness

JEL Classification: F31, F32, F44, F45

Suggested Citation

Saadaoui, Jamel, Internal Devaluations and Equilibrium Exchange Rates: New Evidences and Perspectives for the EMU (November 11, 2017). 3rd International Workshop on Financial Markets and Nonlinear Dynamics; Applied Economics, 50:59, 6364-6381, DOI: 10.1080/00036846.2018.1486019. Available at SSRN: https://ssrn.com/abstract=2985302 or http://dx.doi.org/10.2139/ssrn.2985302

Jamel Saadaoui (Contact Author)

University of Strasbourg ( email )

61 Avenue de la ForĂȘt Noire
Strasbourg, Alsace 67000
France

HOME PAGE: http://www.jamelsaadaoui.com/

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