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Fiscal devaluations in a context of financial frictions

Author

Listed:
  • Diego Piccardo

    (Universidad del CEMA)

Abstract

Fiscal devaluations have been conceived as an economic policy instrument aimed at countries where a nominal exchange-rate devaluation is not a viable option. However, implementing a fiscal devaluation also requires financing capacity to cover the temporary deficit that such a policy generates. In this sense, the conditions for its application differ substantially between an emerging economy with a fixed exchange rate and a member country of the European Union. This paper develops a theoretical analysis of the implications of this instrument in a context of borrowing constraints. The results suggest that the benefits typically attributed to fiscal devaluations are considerably weakened when the government faces financing limitations since, being unable to borrow, it must offset the reduction in taxes through increases in other taxes or cuts in public spending.

Suggested Citation

  • Diego Piccardo, 2025. "Fiscal devaluations in a context of financial frictions," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(86), pages 87-115, November.
    • Handle: RePEc:bcr:ensayo:v:1:y:2025:i:86:p:87-115
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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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