The Open UniversitySkip to content
 

Rebalancing the Euro area: the costs of internal devaluation

Stockhammer, Engelbert and Sotiropoulos, Dimitris (2014). Rebalancing the Euro area: the costs of internal devaluation. Review of Political Economy, 26(2) pp. 210–233.

URL: http://www.tandfonline.com/doi/abs/10.1080/0953825...
DOI (Digital Object Identifier) Link: https://doi.org/10.1080/09538259.2014.881011
Google Scholar: Look up in Google Scholar

Abstract

This paper investigates the economic costs of rebalancing current account positions in the Euro area by means of internal devaluation. Internal devaluation relies on wage suppression in the deficit countries. Based on an old Keynesian model we estimate a current account equation, a wage-Phillips curve and an Okun's Law equation. All estimations are carried out for a panel of twelve Euro area members. From the estimation results we calculate the output costs of reducing current account deficits. Greece, Ireland, Italy, Portugal and Spain (GIIPS) had, on average, current account deficits of 8.4% of GDP in 2007. To eliminate these current account deficits, a reduction of GPD by some 47% would be necessary. Trade imbalances can be resolved in two ways: deflationary adjustment in the deficit countries or inflationary adjustment in the surplus countries. The economic costs of deflationary adjustment to those countries are equivalent to the output loss of the Great Depression. An adjustment of the surplus countries would increase growth and it would come with higher inflation, but it would allow rebalancing without a Great Depression in parts of Europe.

Item Type: Journal Item
Copyright Holders: 2014 Taylor & Francis
ISSN: 1465-3982
Academic Unit/School: Faculty of Business and Law (FBL) > Business > Department for Accounting and Finance
Faculty of Business and Law (FBL) > Business
Faculty of Business and Law (FBL)
Research Group: Innovation, Knowledge & Development research centre (IKD)
Item ID: 40443
Depositing User: Dimitris Sotiropoulos
Date Deposited: 30 Jun 2014 08:57
Last Modified: 07 Dec 2018 10:24
URI: http://oro.open.ac.uk/id/eprint/40443
Share this page:

Metrics

Altmetrics from Altmetric

Citations from Dimensions

Actions (login may be required)

Policies | Disclaimer

© The Open University   contact the OU