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Fiscal devaluation in the euro area: A model-based analysis

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  • Gomes, S.
  • Jacquinot, P.
  • Pisani, M.

Abstract

We assess the effects of a temporary fiscal devaluation enacted in Spain on the trade balance by simulating EAGLE, a large-scale multi-country dynamic general equilibrium model of the euro area. Social contributions paid by firms are reduced by 1% of GDP for four years and are financed by increasing the consumption tax. Our main results are the following. First, in the first years following implementation the Spanish trade balance improves by around 0.6% of GDP, the (before-consumption tax) real exchange rate depreciates by 0.7% and the terms of trade deteriorate by 1.3%. Second, the trade balance improves when the temporary fiscal devaluation is also enacted in the rest of the euro area, albeit to a lower extent than in the case of unilateral (country-specific) implementation. Third, similar results are obtained if we consider the case of a smaller euro area economy, specifically Portugal. Fourth, quantitative results are robust to changes in some key parameters but crucially depend on the degree of substitutability between domestic and imported tradables.

Suggested Citation

  • Gomes, S. & Jacquinot, P. & Pisani, M., 2016. "Fiscal devaluation in the euro area: A model-based analysis," Economic Modelling, Elsevier, vol. 52(PA), pages 58-70.
  • Handle: RePEc:eee:ecmode:v:52:y:2016:i:pa:p:58-70
    DOI: 10.1016/j.econmod.2015.06.019
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    Cited by:

    1. Jacquinot, Pascal & Lozej, Matija & Pisani, Massimiliano, 2018. "Labour tax reforms, cross-country coordination and the monetary policy stance in the euro area: a structural model-based approach," Working Paper Series 2127, European Central Bank.
    2. repec:eee:ecolet:v:163:y:2018:i:c:p:13-16 is not listed on IDEAS
    3. Lukas Vogel, 2017. "Stabilization and Rebalancing with Fiscal or Monetary Devaluation: a Model-Based Comparison," CESifo Economic Studies, CESifo, vol. 63(2), pages 235-253.
    4. Gadatsch, Niklas & Stähler, Nikolai & Weigert, Benjamin, 2016. "German labor market and fiscal reforms 1999–2008: Can they be blamed for intra-euro area imbalances?," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 307-324.
    5. M. Bussière & L. Ferrara & M. Juillard & D. Siena, 2017. "Can Fiscal Budget-Neutral Reforms Stimulate Growth? Model-Based Results," Working papers 625, Banque de France.
    6. Clancy, Daragh & Jacquinot, Pascal & Lozej, Matija, 2016. "Government expenditure composition and fiscal policy spillovers in small open economies within a monetary union," Journal of Macroeconomics, Elsevier, vol. 48(C), pages 305-326.
    7. repec:eee:ecmode:v:71:y:2018:i:c:p:279-288 is not listed on IDEAS
    8. Hubert Gabrisch & Doris Hanzl-Weiss & Mario Holzner & Michael Landesmann & Johannes Pöschl & Hermine Vidovic, 2015. "Steigerung der Wettbewerbsfähigkeit in der Balkanregion – Möglichkeiten und Grenzen," wiiw Research Reports in German language 3, The Vienna Institute for International Economic Studies, wiiw.
    9. repec:spr:weltar:v:154:y:2018:i:2:d:10.1007_s10290-018-0309-5 is not listed on IDEAS
    10. Hohberger, Stefan & Kraus, Lena, 2016. "Is fiscal devaluation welfare enhancing?," Economic Modelling, Elsevier, vol. 58(C), pages 512-522.
    11. Vukšić, Goran & Holzner, Mario, 2016. "Trade and fiscal imbalances in Southeastern Europe: Can fiscal devaluation help?," Economic Systems, Elsevier, vol. 40(4), pages 568-581.

    More about this item

    Keywords

    Fiscal devaluation; Trade balance; Dynamic general equilibrium modeling;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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