Deciphering the Macroeconomic Effects of Internal Devaluations in a Monetary Union

38 Pages Posted: 15 Jun 2020 Last revised: 23 Mar 2023

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 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.

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 2020). NBER Working Paper No. w27347, Available at SSRN: https://ssrn.com/abstract=3626848

Javier Andrés (Contact Author)

University of Valencia - Department of Economics ( email )

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Oscar Arce

Banco de España ( email )

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Jesús Fernández-Villaverde

University of Pennsylvania - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Samuel Hurtado

Banco de España ( email )

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Spain

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