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Importance of Productivity in Non-Optimal Currency Areas

In: Advances in Applied Economic Research

Author

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  • Carlos Encinas-Ferrer

    (Universidad del Valle de Atemajac (UNIVA))

Abstract

The devaluation tool has, in an open optimal currency area with monetary sovereignty, a very high weight in determining economic policies to adjust relative costs and interest rates to the situation faced by a country to economic shocks either asymmetric or generalized. The devaluation risk is caused not only by domestic inflation, but by imported inflation as well. If inflation of a nation is greater than the average one of its trading partners and the gap between them is not adjusted by the depreciation of its currency, it will start the process of overvaluation. This overvaluation ends manifesting in a growing lack of competitiveness in its foreign trade with a growing trade deficit, reduced gross domestic product, rising unemployment, and falling wages.

Suggested Citation

  • Carlos Encinas-Ferrer, 2017. "Importance of Productivity in Non-Optimal Currency Areas," Springer Proceedings in Business and Economics, in: Nicholas Tsounis & Aspasia Vlachvei (ed.), Advances in Applied Economic Research, chapter 0, pages 799-807, Springer.
    • Handle: RePEc:spr:prbchp:978-3-319-48454-9_52
    DOI: 10.1007/978-3-319-48454-9_52
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    Keywords

    Productivity; Non-optimal currency areas;

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