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Fiscal Devaluations in EMU

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  • José Emilio Boscá
  • Rafael Domenech
  • Javier Ferri

Abstract

We use a small open economy general equilibrium model to analyse the effects of a fiscal devaluation in EMU. The model has been calibrated for the Spanish economy, that is a good example of the advantages of a change in the tax mix, given that its tax system shows a positive bias in the ratio of social security contributions over consumption taxes. The preliminary empirical evidence for European countries shows that this bias was negatively correlated with the current account balance in the expansionary years previous to the 2009 crisis, where many EMU members accumulated large external imbalances. Our simulations results point to positive significant effects of a fiscal devaluation on GDP and employment similar to the ones that could be obtained with a exchange rate devaluation. However, although the effects in terms of GDP and employment are similar, the composition effects of fiscal and nominal devaluations are not alike. In both cases, there is an improvement in net exports, but the effects on domestic and external demand are quite different.

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Bibliographic Info

Paper provided by BBVA Bank, Economic Research Department in its series Working Papers with number 1211.

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Length: 15 pages
Date of creation: Jun 2012
Date of revision:
Handle: RePEc:bbv:wpaper:1211

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Keywords: tax mix; fiscal devaluation; nominal devaluation;

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  1. Javier Alonso & David Tuesta & Jasmina Bjeletic & Carlos Herrera & Soledad Hormazabal & Ivonne Ordonez & Carolina Romero, 2009. "Proyecciones del impacto de los fondos de pensiones en la inversion en infraestructura y el crecimiento en Latinoamerica," Working Papers 0921, BBVA Bank, Economic Research Department.
  2. KC Fung & Alicia Garcia-Herrero & Mario Nigrinis Ospina, 2013. "Latin American Commodity Export Concentration: Is There a China Effect?," Working Papers 1306, BBVA Bank, Economic Research Department.
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