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Fiscal Devaluation and Structural Gaps

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  • F. Langot
  • L. Patureau
  • T. Sopraseuth

Abstract

The paper characterizes the optimal tax scheme in an open economy with structural inefficiencies on the labor market and on government size. On analytical grounds first, we show that the economy can use fiscal revaluation to exploit the terms of trade externality and to dampen the impact of an excessive public spending. However, if real labor market rigidities are large enough, fiscal devaluation may be desirable. Second, we provide a quantitative assessment of the optimal tax reform using France as the benchmark economy. Our results show that France would benefit more from fiscal devaluation than a economy where the labor market is more flexible, as the US. We also show that the welfare gains from the optimal tax reform crucially depend on the ability of the government to target its optimal size.

Suggested Citation

  • F. Langot & L. Patureau & T. Sopraseuth, 2014. "Fiscal Devaluation and Structural Gaps," Working papers 508, Banque de France.
  • Handle: RePEc:bfr:banfra:508
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    Cited by:

    1. 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.
    2. Bielecki, Marcin & Stähler, Nikolai, 2018. "Labor tax reductions in Europe: The role of property taxation," Discussion Papers 30/2018, Deutsche Bundesbank.
    3. Stähler, Nikolai, 2019. "Who benefits from using property taxes to finance a labor tax wedge reduction?," Journal of Housing Economics, Elsevier, vol. 46(C).
    4. 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.
    5. Langot, François & Lemoine, Matthieu, 2017. "Strategic fiscal policies in Europe: Why does the labour wedge matter?," European Economic Review, Elsevier, vol. 91(C), pages 15-29.
    6. Ciżkowicz, Piotr & Radzikowski, Bartosz & Rzońca, Andrzej & Wojciechowski, Wiktor, 2020. "Fiscal devaluation and economic activity in the EU," Economic Modelling, Elsevier, vol. 88(C), pages 59-81.
    7. José Ramón García & Valeri Sorolla, 2016. "The Calmfors-Driffill Hypothesis with Labour Market Frictions and Regulated Goods Markets," Working Papers 889, Barcelona Graduate School of Economics.
    8. Cacciatore, Matteo & Duval, Romain & Fiori, Giuseppe & Ghironi, Fabio, 2016. "Short-term pain for long-term gain: Market deregulation and monetary policy in small open economies," Journal of International Money and Finance, Elsevier, vol. 68(C), pages 358-385.
    9. Maria-Grazia Attinasi & Doris Prammer & Nikolai Stähler & Martino Tasso & Stefan van Parys, 2019. "Budget-Neutral Labor Tax Wedge Reductions: A Sumulation-Based Analysis for the Euro Area," International Journal of Central Banking, International Journal of Central Banking, vol. 15(4), pages 1-54, October.
    10. Ruppert, Kilian & Stähler, Nikolai, 2020. "Household savings, capital investments and public policies: What drives the German current account?," Discussion Papers 41/2020, Deutsche Bundesbank.
    11. F. Langot & M. Lemoine, 2014. "Strategic fiscal revaluation or devaluation: why does the labor wedge matter?," Working papers 516, Banque de France.

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    More about this item

    Keywords

    Consumption tax; payroll tax; Ramsey allocation; labor market search; open economy; public spending.;
    All these keywords.

    JEL classification:

    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy

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