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Fiscal Devaluations

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Author Info

  • Oleg Itskhoki

    (Princeton University)

  • Gita Gopinath

    (Harvard)

  • Emmanuel Farhi

    (Harvard University)

Abstract

The crisis in the Euro area has partly been blamed on the inability of individual countries to devalue their currencies. In this paper we evaluate the extent to which fiscal instruments can be used to replicate the behavior of an exchange rate devaluation in a New Keynesian Open Economy environment. We perform the analysis under alternate assumptions of producer and local currency pricing. We show that a combination of uniform import tariffs, export subsidies, consumption and labor taxes can generate allocations identical to those that follow an exchange rate devaluation. The specifics of which taxes are needed depend on the completeness of asset markets.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 406.

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Date of creation: 2011
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Handle: RePEc:red:sed011:406

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References

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  1. Isabel Correia & Emmanuel Farhi & Juan Pablo Nicolini & Pedro Teles, 2013. "Unconventional Fiscal Policy at the Zero Bound," American Economic Review, American Economic Association, American Economic Association, vol. 103(4), pages 1172-1211, June.
  2. Gourinchas, Pierre-Olivier & Rey, Hélène, 2005. "From World Banker to World Venture Capitalist: US External Adjustment and the Exorbitant Privilege," CEPREMAP Working Papers (Docweb), CEPREMAP 0606, CEPREMAP.
  3. Juan Pablo Nicolini & Constantino Hevia, 2004. "Optimal Devaluations," Econometric Society 2004 Latin American Meetings, Econometric Society 337, Econometric Society.
  4. Maurice Obstfeld and Kenneth Rogoff., 1999. "New Directions for Stochastic Open Economy Models," Center for International and Development Economics Research (CIDER) Working Papers, University of California at Berkeley C99-107, University of California at Berkeley.
  5. Devereux, Michael B. & Engel, Charles, 2007. "Expenditure switching versus real exchange rate stabilization: Competing objectives for exchange rate policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(8), pages 2346-2374, November.
  6. Philippe Andrade, 2010. "Competition and Pass-through on international markets: Firm-level evidence from VAT shocks," 2010 Meeting Papers, Society for Economic Dynamics 820, Society for Economic Dynamics.
  7. Bernardino Adão & Isabel Horta Correia & Pedro Teles, 2006. "On the Relevance of Exchange Rate Regimes for Stabilization Policy," Working Papers, Banco de Portugal, Economics and Research Department w200616, Banco de Portugal, Economics and Research Department.
  8. Lane, P, 1999. "The New Open Economy Macroeconomics: A Survey," Trinity Economics Papers, Trinity College Dublin, Department of Economics 993, Trinity College Dublin, Department of Economics.
  9. Stephan Danninger & Alina Carare, 2008. "Inflation Smoothing and the Modest Effect of VAT in Germany," IMF Working Papers 08/175, International Monetary Fund.
  10. Robert W. Staiger & Alan O. Sykes, 2008. ""Currency Manipulation" and World Trade," NBER Working Papers 14600, National Bureau of Economic Research, Inc.
  11. Isabel Correia & Juan Pablo Nicolini & Pedro Teles, 2008. "Optimal fiscal and monetary policy: equivalence results," Staff Report, Federal Reserve Bank of Minneapolis 403, Federal Reserve Bank of Minneapolis.
  12. Michael B. Devereux & Alan Sutherland, 2008. "Country portfolios in open economy macro models," Globalization and Monetary Policy Institute Working Paper, Federal Reserve Bank of Dallas 09, Federal Reserve Bank of Dallas.
  13. J.E. Boscá & A. Díaz & R. Doménech & J. Ferri & E. Pérez & L. Puch, 2007. "A Rational Expectations Model for Simulation and Policy Evaluation of the Spanish Economy," Working Papers, International Economics Institute, University of Valencia 0706, International Economics Institute, University of Valencia.
  14. Eitan Berglas, 1974. "Devaluation, Monetary Policy, and Border Tax Adjustments," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 7(1), pages 1-11, February.
  15. Grossman, Gene M., 1980. "Border tax adjustments: Do they distort trade?," Journal of International Economics, Elsevier, Elsevier, vol. 10(1), pages 117-128, February.
  16. Carbonnier, Clement, 2007. "Who pays sales taxes? Evidence from French VAT reforms, 1987-1999," Journal of Public Economics, Elsevier, Elsevier, vol. 91(5-6), pages 1219-1229, June.
  17. repec:ner:dauphi:urn:hdl:123456789/11165 is not listed on IDEAS
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  1. TVA sociale, tu perds ton sang-froid
    by Benjamin Ting in Economiam on 2012-11-06 20:41:00
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