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Optimal adjustment paths in a monetary union

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  • Belke, Ansgar
  • Gros, Daniel

Abstract

Adjustment to an external imbalance is more diffi cult within a monetary union if wages are sticky. Periods of high unemployment are usually necessary to achieve the required real depreciation (internal devaluation). Gradual adjustment is usually recommended to distribute the output and employment cost over time. This paper takes into account that gradual adjustment also has a cost in terms of higher current account defi cits and thus a higher debt, and ultimately higher debt service costs. We calculate the optimal path/speed of price and wage adjustment in terms of deeper parameters like the slope of the Phillips curve, the degree of openness, etc. Gradual adjustment is not always optimal.

Suggested Citation

  • Belke, Ansgar & Gros, Daniel, 2016. "Optimal adjustment paths in a monetary union," Ruhr Economic Papers 623, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
  • Handle: RePEc:zbw:rwirep:623
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    References listed on IDEAS

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    Cited by:

    1. Ansgar Belke & Daniel Gros, 2017. "Greece and the Troika – Lessons from International Best Practice Cases of Successful Price (and Wage) Adjustment," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 14(2), pages 177-195, December.

    More about this item

    Keywords

    speed of adjustment; price and wage adjustment; internal devaluation; policy complementarities;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • P11 - Economic Systems - - Capitalist Systems - - - Planning, Coordination, and Reform

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