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Title: Deciphering the Macroeconomic Effects of Internal Devaluations in a Monetary Union

Author(s): Javier Andr�s, Oscar Arce, Jes�s Fern�ndez-Villaverde and Samuel Hurtado

Publication Date: May 2020

Keyword(s): internal devaluation, monetary union, policy sequencing, Structural reforms and zero lower bound

Programme Area(s): Monetary Economics and Fluctuations

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.

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Bibliographic Reference

Andr�s, J, Arce, O, Fern�ndez-Villaverde, J and Hurtado, S. 2020. 'Deciphering the Macroeconomic Effects of Internal Devaluations in a Monetary Union'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14829