Decressin, Jörg, Loungani, Prakash, (2015), “EZ internal devaluations: Evidence on negative demand spillovers”, Voxeu, 2 December.
Internal devaluations have been suggested as a possible policy option for countries in a currency union facing large external deficits. These policy actions seek to restore competitiveness by replicating the outcomes of an external devaluation. This column examines wage moderation as a potential means of internal devaluation for EZ countries. If pursued by several countries, wage moderation can work if monetary policy is not constrained by the zero lower bound, or if supported by quantitative easing. Without sufficient monetary accommodation, it will not deliver much of a boost to output, and may hurt overall EZ output.
Relevant Posts
- Decressin, Jorg, Loungani, Prakash, (2015), “The Effects of Wage Moderation: Can Internal Devaluations Work?“, IMF Direct, 17 November.
- In’t Veld, Y., (2013), “Fiscal consolidations and spillovers in the Euro are periphery and core”,European Commission, Directorate-General for Economic and Financial Affairs, Economic Papers 506, October.