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Deflationary Adjustment Processes and the Effectiveness of Structural Reforms In Monetary Unions

Author

Listed:
  • George D. Demopoulos

    (Athens University of Economics and Business, European Chair Jean Monnet)

  • Nicholas A. Yannacopoulos

    (University of Piraeus)

Abstract

In a currency area,the only policy option available to a deficit country to regain the loss of its competitiveness is to deflate. This is going to be a painful process, especially in situations in which the Tobin-Fisher effect is dominant. Adjusting through deflation may destabilize (under certain conditions) the economy of the debtor country, while in cases in which stability is preserved , the economy is trapped in a deflationary equilibrium characterized by low output and employment. There are no policies, at the national level, able to help the economy of the debtor country out of this deflationary trap, if the surplus country insists on preserving its surpluses. In this case, the debtor is forced to reduce its spending , demand side policies are out of question, while supply policies are counterproductive. Deflation may also worsen the terms of trade of the debtor country, reducing further its welfare.

Suggested Citation

  • George D. Demopoulos & Nicholas A. Yannacopoulos, 2016. "Deflationary Adjustment Processes and the Effectiveness of Structural Reforms In Monetary Unions," Working Papers 201602, Athens University Of Economics and Business, Department of Economics.
    • Handle: RePEc:aeb:wpaper:201602:y:2016
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F15 - International Economics - - Trade - - - Economic Integration
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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