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Fiscal Devaluation in a Monetary Union


  • 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.

Suggested Citation

  • Philipp Engler & Giovanni Ganelli & Juha Tervala & Simon Voigts, 2017. "Fiscal Devaluation in a Monetary Union," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 65(2), pages 241-272, June.
  • 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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    References listed on IDEAS

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    Cited by:

    1. Dräger, Lena & Proaño, Christian R., 2015. "Cross-border banking and business cycles in asymmetric currency unions," Discussion Papers 21/2015, Deutsche Bundesbank.
    2. 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.
    3. Gadatsch, Niklas & Stähler, Nikolai & Weigert, Benjamin, 2014. "German labor market and fiscal reforms 1999 to 2008: Can they be blamed for intra-Euro Area imbalances?," Working Papers 05/2014, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
    4. Zineddine Alla, 2017. "Optimal policies in International Macroeconomics," Sciences Po publications info:hdl:2441/6kvjk9o32n8, Sciences Po.
    5. Hohberger, Stefan & Kraus, Lena, 2016. "Is fiscal devaluation welfare enhancing?," Economic Modelling, Elsevier, vol. 58(C), pages 512-522.
    6. Auray, Stéphane & Eyquem, Aurélien & Ma, Xiaofei, 2017. "Competitive tax reforms in a monetary union with endogenous entry and tradability," European Economic Review, Elsevier, vol. 98(C), pages 126-143.
    7. Kaufmann, Christoph, 2016. "Optimal Fiscal Substitutes For The Exchange Rate In A Monetary Union," Annual Conference 2016 (Augsburg): Demographic Change 145873, Verein für Socialpolitik / German Economic Association.
    8. Stefan Hohberger & Lukas Vogel & Bernhard Herz, 2014. "Budgetary-Neutral Fiscal Policy Rules and External Adjustment," Open Economies Review, Springer, vol. 25(5), pages 909-936, November.
    9. Loes Verstegen & Lex Meijdam, 2016. "The Effectiveness of a Fiscal Transfer Mechanism in a Monetary Union: A DSGE Model for the Euro Area," EcoMod2016 9622, EcoMod.
    10. Berghäll, Pii Elina, 2013. "Miksi eurosta kannattaa erota
      [Why Finland should abandon the euro]
      ," MPRA Paper 68830, University Library of Munich, Germany, revised 15 Jan 2016.
    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.
    12. Hohberger, Stefan & Kraus, Lena, 2015. "Is fiscal devaluation welfare enhancing? A model-based analysis," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113193, Verein für Socialpolitik / German Economic Association.
    13. repec:eee:ecolet:v:163:y:2018:i:c:p:13-16 is not listed on IDEAS
    14. Attinasi, Maria-Grazia & Prammer, Doris & Stähler, Nikolai & Tasso, Martino & Van Parys, Stefan, 2016. "Budget-neutral labour tax wedge reductions: A simulation-based analysis for selected euro area countries," Discussion Papers 26/2016, Deutsche Bundesbank.
    15. Brede, Maren, 2016. "Budget-neutral fiscal rules targeting inflation differentials," Annual Conference 2016 (Augsburg): Demographic Change 145513, Verein für Socialpolitik / German Economic Association.

    More about this item


    E32; E62; F32; F41;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • 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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