Internal Devaluation in the Eurozone; a historical and quantitative analysis

Details

Supervisors

Bodart, Vincent ; de Regt, Erik

Faculty

Faculté des sciences économiques, sociales, politiques et de communication

Degree label

Master [120] en sciences économiques, orientation générale

Abstract

Eurozone countries – as members of a monetary union – face the trilemma of international finance: a country cannot enjoy at the same time fixed exchange rate, free capital mobility and a sovereign monetary policy. They have to give up the latter to enjoy the two formers. In absence of national monetary policy, members of the Euro area cannot use the tool of external devaluation (i.e. devaluate the nominal exchange rate) to restore competitiveness in case of exogenous shocks. Instead, they are forced to implement deflationary measures such as internal devaluations (i.e. a compression of domestic prices and labour costs – devaluate the real effective exchange rate).