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Fiscal Devaluation in a Monetary Union

Listed author(s):
  • Philipp Engler

    ()

    (Freie Universität Berlin)

  • Giovanni Ganelli

    ()

    (IMF Regional Office for Asia and the Pacific)

  • Juha Tervala

    ()

    (University of Helsinki)

  • Simon Voigts

    ()

    (Humboldt-Universität zu Berlin)

Abstract Given that exchange rate devaluations are no longer available in a monetary union, fiscal devaluations are one potential way to address divergence in competitiveness and trade imbalances. Employing a DSGE model calibrated to the euro area, we quantify the international effects of a fiscal devaluation implemented as a revenue-neutral shift from employers’ social contributions to the value added tax. We find that a fiscal devaluation carried out in the South has a strong positive effect on output, which is five times larger than under a wage tax cut. However, the effect on the trade balance and the real exchange rate is mild. The negative effect on the North’s output is weak.

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File URL: http://link.springer.com/10.1057/s41308-016-0002-4
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Article provided by Palgrave Macmillan & International Monetary Fund in its journal IMF Economic Review.

Volume (Year): 65 (2017)
Issue (Month): 2 (June)
Pages: 241-272

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Handle: RePEc:pal:imfecr:v:65:y:2017:i:2:d:10.1057_s41308-016-0002-4
DOI: 10.1057/s41308-016-0002-4
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