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Optimal Fiscal Devaluation

Author

Listed:
  • Langot, François

    () (University of Le Mans)

  • Patureau, Lise

    () (University of Lille 1)

  • Sopraseuth, Thepthida

    () (University of Cergy-Pontoise)

Abstract

We study fiscal devaluation in a small-open economy with labor market search frictions. Our analysis shows the key role of both dimensions in shaping the optimal tax scheme. By reducing labor market distortions, the tax reform is welfare-improving. Yet, as it makes imports more expensive, fiscal devaluation lowers the agents' purchasing power, which is welfare-reducing. These contrasting effects give rise to an optimal tax scheme. Besides, transition matters. If the economy is better off in the long run, the required transitional saving effort increases the cost of the reform, thereby calling for a moderate magnitude of fiscal devaluation.

Suggested Citation

  • Langot, François & Patureau, Lise & Sopraseuth, Thepthida, 2012. "Optimal Fiscal Devaluation," IZA Discussion Papers 6624, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp6624
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    Cited by:

    1. 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.
    2. repec:eee:ecmode:v:71:y:2018:i:c:p:279-288 is not listed on IDEAS
    3. Hohberger, Stefan & Kraus, Lena, 2016. "Is fiscal devaluation welfare enhancing?," Economic Modelling, Elsevier, vol. 58(C), pages 512-522.
    4. Olivier Cardi & Romain Restout, 2014. "Unanticipated vs. Anticipated Tax Reforms in a Two-Sector Open Economy," Open Economies Review, Springer, vol. 25(2), pages 373-406, April.
    5. 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.

    More about this item

    Keywords

    fiscal devaluation; consumption tax; payroll tax; labor market search; small open economy; Dynamic General Equilibrium model;

    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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