Saturday, December 24, 2011

Why devaluation is the most effective route to regain competitiveness?

As many Eurozone economies face their winter of discontent, there is an intense debate about the best possible route to recovery. Since, the underlying problem is one of eroded competitiveness, its recovery can be achieved either through internal (austerity and wage freezes) or external (currency depreciation) devaluation.

Paul Krugman points to this brilliant description of why external devaluation is a far superior alternative from Milton Friedman's 1953 essay, "The case for flexible exchange rates".

How I wish I could have written that!

However, as Krugman and Matt Yglesias write, some like John Cochrane prefer the ciomplicated solutions.

Update 1 (26/12/2011)

Paul Krugman has this graphic which shows how Iceland could let its currency devalue and achieve a quick 30 percent fall in wages relative to the euro zone.

1 comment:

Anonymous said...

nice article bro....its good that u copied that cutting...intellectual bakchodi :)