Defining the right internal exchange rate

Xavier Timbeau (1) , Lars Anderson , Christophe Blot (1) , Jérôme Creel (1) , Andrew Watt

1 OFCE - Observatoire français des conjonctures économiques (Sciences Po)

European economies need to adjust to a sustainable growth path. That implies adjusting internal exchange rates. Since the start of the Great Recession, euro area crisis countries (and more specifically Greece, Portugal, Spain, Italy, Ireland) have engaged in austerity policies in order to slash public deficits, but also in attempt to regain lost competitiveness. These policies, by weighing on internal demand and growth, have successively pushed euro area countries into competitive disinflation policies. This non-cooperative game, whose goal is to win market shares against euro area partners by improving the country’s price-competitiveness, has already had sharp disinflationary effects and runs the risk of pushing the euro area economy into deflation, a threat already identified in last year’s iAGS report. (First paragraph)

Keywords: internal exchange rate

Domains: Economics and Finance

Xavier Timbeau, Lars Anderson, Christophe Blot, Jérôme Creel, Andrew Watt. Defining the right internal exchange rate: Chapter 5. Revue de l'OFCE, 2015, IAGS 2015, pp.165 - 189. ⟨hal-03473710⟩