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Fiscal Devaluations

  • Oleg Itskhoki

    (Princeton University)

  • Gita Gopinath

    (Harvard)

  • Emmanuel Farhi

    (Harvard University)

The crisis in the Euro area has partly been blamed on the inability of individual countries to devalue their currencies. In this paper we evaluate the extent to which fiscal instruments can be used to replicate the behavior of an exchange rate devaluation in a New Keynesian Open Economy environment. We perform the analysis under alternate assumptions of producer and local currency pricing. We show that a combination of uniform import tariffs, export subsidies, consumption and labor taxes can generate allocations identical to those that follow an exchange rate devaluation. The specifics of which taxes are needed depend on the completeness of asset markets.

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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 406.

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Date of creation: 2011
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Handle: RePEc:red:sed011:406
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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  1. Isabel Correia & Juan Pablo Nicolini & Pedro Teles, 2008. "Optimal Fiscal and Monetary Policy: Equivalence Results," Journal of Political Economy, University of Chicago Press, vol. 116(1), pages 141-170, 02.
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  13. Gianluca Benigno & Pierpaolo Benigno & Fabio Ghironi, 2000. "Interest Rate Rules for Fixed Exchange Rate Regimes," Boston College Working Papers in Economics 468, Boston College Department of Economics, revised 13 Oct 2003.
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