Simulating devaluation Post author By Kevin O’Rourke Post date February 26, 2009 Readers of this blog will be familiar with the arguments made in a two-parter here and here. (Can’t say that I would have chosen those headings though.) Categories In Uncategorized 5 Comments on Simulating devaluation ← The Irish Strategy for the Banking Sector → The division of regulation depends on the extent of the market (or at least it ought to) 5 replies on “Simulating devaluation” One trick that is being missed: A major cost to workers is the cost of a mortgage. If the government could guarantee that in future new mortgages will bear a reasonable relationship to earnings (unlike the absurdities of the last few years) then some people will be more likely to accept cuts in their nominal income. They could see that although their income will be reduced so will their major expenditure. I know this will penalise those with existing newish mortgages but it’s almost certain that they are stuffed anyway. “The argument that this would lead to economy-wide deflation is specious, since the economy-wide price level that is relevant for us is the European price level…” I wonder could you (or anyone) expand on and explain that a little bit more for we non-experts? Why is deflation a non-risk for us? devaluation…. y’know it reminds me of daylight savings time. Do it and nobody complains but instead ask people to come into work at 8a.m. for six months of the year and there would be uproar! isn’t devaluation really just another way of getting to where we are with some deflation? all roads lead to rome. Yes – there do appear to be lessons to be learned ‘from the successful Swedish fiscal consolidation of the 1990s, Jens Henriksson wrote: “A consolidation programme has to be designed as a comprehensive package. An ad hoc hodge-podge of measures will only have a limited chance of success. Presenting the consolidation measures in one package makes it clear to all interest groups that they are not the only ones being asked to make sacrifices. ” Thus far, key Irish Gov Actors have not demonstrated an understanding of how to package the ‘big picture’ of what is/may be needed. ICTU seem more aware of both sides – cost reduction and revenue generation(including further taxation). A horrible thought – are tax increases being postponed to post local/euro elections? Yet another form of ‘moral hazard’ ……….. @James: we can’t influence the European price level. If there were to be a real deflationary spiral, that would arise because of what the ECB did, not because of anything that happens here. Reducing our wages and costs should be thought of as a reduction in a key relative price — the price of Irish labour and output relative to European labour and output — rather than as a reduction in ‘the’ price level. Comments are closed.