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Stabilization and Rebalancing with Fiscal or Monetary Devaluation: a Model-Based Comparison

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  • Lukas Vogel

Abstract

The article uses a small open economy version of the macroeconomic general-equilibrium model QUEST to compare fiscal and nominal exchange rate (EXR) devaluation with respect to their impact on economic activity and the current account. In particular, the article investigates quantitatively to which extent fiscal devaluation mimics nominal EXR adjustment and mitigates the output loss associated with demand rebalancing and external adjustment by shifting adjustment from domestic demand contraction to export growth. Fiscal and monetary devaluation support external adjustment and mitigate its impact on economic activity in the presence of price and wage rigidities. The quantitative impact of a tax shift from labour to consumption as the standard example of fiscal devaluation remains very moderate, however (JEL codes: E52, F41, F47).

Suggested Citation

  • Lukas Vogel, 2017. "Stabilization and Rebalancing with Fiscal or Monetary Devaluation: a Model-Based Comparison," CESifo Economic Studies, CESifo Group, vol. 63(2), pages 235-253.
    • Handle: RePEc:oup:cesifo:v:63:y:2017:i:2:p:235-253.
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    File URL: http://hdl.handle.net/10.1093/cesifo/ifw016
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    Cited by:

    1. Matthias Burgert & Werner Roeger & Janos Varga & Jan in 't Veld & Lukas Vogel, 2020. "A Global Economy Version of QUEST: Simulation Properties," European Economy - Discussion Papers 126, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    2. Lukas Vogel, 2017. "Stabilization and Rebalancing with Fiscal or Monetary Devaluation: a Model-Based Comparison," CESifo Economic Studies, CESifo Group, vol. 63(2), pages 235-253.

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    More about this item

    Keywords

    devaluation; exchange rate; tax shift; recession; rebalancing;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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