December 2022 issue contents
Deciphering the Macroeconomic Effects of Internal Devaluations in a Monetary Union

Javier Andrésa, Óscar Arceb, Jesús Fernández-Villaverdec and Samuel Hurtadod


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. Nonetheless, when the ZLB binds, a sequencing of reforms that prioritizes labor policies over goods markets reforms might increase the present discounted value of output.

JEL Code: E44, E63, D42.

Online appendix (PDF)

Universidad de Valencia 
b  European Central Bank 
c  University of Pennsylvania, NBER, and CEPR
d  Banco de Espana