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Optimal Adjustment Paths in a Monetary Union. CEPS Working Document No. 424 / July 2016

Belke, Ansgar and Gros, Daniel. (2016) Optimal Adjustment Paths in a Monetary Union. CEPS Working Document No. 424 / July 2016. [Working Paper]

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    Adjustment to an external imbalance is more difficult 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 deficits 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.

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    Item Type: Working Paper
    Uncontrolled Keywords: Speed of adjustment, price and wage adjustment, internal devaluation, policy complementarities
    Subjects for non-EU documents: EU policies and themes > Policies & related activities > economic and financial affairs > EMU/EMS/euro
    Subjects for EU documents: UNSPECIFIED
    EU Series and Periodicals: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > Centre for European Policy Studies (Brussels) > CEPS Working Documents
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 27 Jul 2016 12:37
    Number of Pages: 23
    Last Modified: 27 Jul 2016 12:37

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