Deciphering the Macroeconomic Effects of Internal Devaluations in a Monetary Union

43 Pages Posted: 8 Jun 2020

See all articles by Javier Andrés

Javier Andrés

University of Valencia - Department of Economics

Oscar Arce

Banco de España

Jesús Fernández-Villaverde

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Samuel Hurtado

Banco de España

Multiple version iconThere are 3 versions of this paper

Date Written: June 5, 2020

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

JEL Classification: E44, E63, D42

Suggested Citation

Andrés, Javier and Arce, Oscar and Fernández-Villaverde, Jesús and Hurtado, Samuel, Deciphering the Macroeconomic Effects of Internal Devaluations in a Monetary Union (June 5, 2020). Banco de Espana Working Paper No. 2016, Available at SSRN: https://ssrn.com/abstract=3619903 or http://dx.doi.org/10.2139/ssrn.3619903

Javier Andrés (Contact Author)

University of Valencia - Department of Economics ( email )

E-46022 Valencia, Valencia E-46022
Spain
(34 96) 382 8260 (Phone)
(34 96) 382 8249 (Fax)

Oscar Arce

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Jesús Fernández-Villaverde

University of Pennsylvania - Department of Economics ( email )

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Philadelphia, PA 19104
United States
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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Samuel Hurtado

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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