Working Paper: NBER ID: w27347
Authors: Javier Andrés; Scar Arce; Jess Fernández-Villaverde; Samuel Hurtado
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: internal devaluation; monetary union; macroeconomic effects; structural reforms; euro area
JEL Codes: D42; E44; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Internal devaluations (L16) | long-run output gains in the periphery (E23) |
| Internal devaluations (L16) | enhance efficiency (D61) |
| Enhance efficiency (D61) | stimulate investment (E22) |
| Goods market reforms (E69) | stronger growth effects (O49) |
| Wage moderation (J38) | less deflationary effects (E31) |
| Labor market reforms (J48) | smaller output effects (E23) |
| Dual nominal rigidities (D10) | impede transmission of wage changes to final goods prices (F16) |
| ZLB binding (F16) | timing of reforms is crucial (C41) |
| Labor market reforms before goods market reforms (E69) | positive spillover effects on core region (R11) |
| Internal devaluations (L16) | enhance overall efficiency (D61) |
| Nominal devaluations (F31) | no positive spillover effects on core region (R11) |