Act for Currency Unions

Abstract

When real wages in an economy no longer reflect productivity, normally devaluations of the currency restore international price-competitiveness via imported inflation that reduces real wages. This instrument is not available in a currency union. The job has to be done by reductions in nominal wages that are felt as more severe pain than inflation-induced reductions in real wages. To ease this pain a special currency split is proposed: ACT takes over the function as a medium of exchange i.e. for flows but not for stocks. Thus ACT can devaluate while all stocks are not devaluated. When international price-competitiveness is restored and no further devaluation is needed, the currency split ends.