"Internal devaluations" are too costly

When a country in a currency area has a cost competitiveness disadvantage, in principle it practices an "internal devaluation", i.e. a reduction in labour costs relative to the other countries , which restores its competitiveness. But in reality, an internal devaluation is too costly to practice, and is therefore not an effective way to restore cost competitiveness. The reasons are as follows: An internal devaluation reduces household demand and real activity, while a real devaluation in a flexible exchange-rate regime, has an expansionary effect, at least on industry; An internal devaluation leads to a decline in inflation, and therefore to a rise in real interest rates and debt ratios; An internal devaluation is effective only if it is practised by a single country, without reaction from other countries. We can then consider a fiscal devaluation ( 1) instead of an internal devaluation, but it is limited in its size and, moreover, also assumes that it will not be duplicated by other countries. See for example E. Fahri , G. Gopinath, O. I tskhoki (2012), Fiscal Devaluation, Working Paper n o. 12-10, Federal Reserve Bank of Boston.