NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Óscar Arce

Banco de España
Calle de Alcalá, 48
Madrid 28014
Spain

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Institutional Affiliation: Banco de España

NBER Working Papers and Publications

June 2020Deciphering the Macroeconomic Effects of Internal Devaluations in a Monetary Union
with Javier Andrés, Jesús Fernández-Villaverde, Samuel Hurtado: w27347
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 ove...
 
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