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The role of internal devaluation in correcting external deficits: The case of Spain

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  • Villanueva, Paloma
  • Cárdenas, Luis
  • Uxó, Jorge
  • Álvarez, Ignacio

Abstract

This paper carries out an ex-post evaluation of the internal devaluation policy in correcting external deficits. We examine to what extent and through which mechanisms the internal devaluation strategy implemented after 2010 is responsible for the readjustment in net exports in the case of Spain. Our analysis incorporates the effects linked to changes in external competitiveness and domestic prices and those associated with changes in income distribution. The main way in which internal devaluation contributed to external readjustment was through a decrease in domestic demand and imports rather than through enhanced external competitiveness. These demand effects derived from the distributive impact of changes in unit labor costs, which reduced the Spanish wage share during this period. According to our estimates, internal devaluation explains 33% of total external sector readjustment over the 2010-2018 period, 98% of which is driven by the demand effect, with the remaining 2% resulting from price effects.

Suggested Citation

  • Villanueva, Paloma & Cárdenas, Luis & Uxó, Jorge & Álvarez, Ignacio, 2020. "The role of internal devaluation in correcting external deficits: The case of Spain," Structural Change and Economic Dynamics, Elsevier, vol. 54(C), pages 282-296.
    • Handle: RePEc:eee:streco:v:54:y:2020:i:c:p:282-296
    DOI: 10.1016/j.strueco.2020.03.008
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    Cited by:

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    3. Miguel Angel Casau & Daniel Herrero, 2024. "Deindustrialization paths and growth models: Germany and Spain in comparative perspective," LEM Papers Series 2024/06, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    4. Kuokštis, Vytautas & Asali, Muhammad & Spurga, Simonas Algirdas, 2022. "Labor market flexibility and exchange rate regimes," European Journal of Political Economy, Elsevier, vol. 75(C).
    5. Alfredo Arahuetes García & Gonzalo Gómez Bengoechea, 2022. "Back to the Future: Lessons from the 2009–2012 austerity policies for the aftermath of the COVID crisis," Global Policy, London School of Economics and Political Science, vol. 13(5), pages 751-766, November.
    6. Javier Bilbao‐Ubillos & Ana‐Isabel Fernández‐Sainz, 2022. "The results of internal devaluation policy as a crisis exit strategy: The case of Spain," Global Policy, London School of Economics and Political Science, vol. 13(5), pages 767-781, November.

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    More about this item

    Keywords

    Spanish current account; Wage share; Price-cost competitiveness; Internal devaluation; Bhaduri-Marglin;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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