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On the (In)effectiveness of Fiscal Devaluations in a Monetary Union

  • von Thadden, Leopold
  • Lipinska, Anna

This paper explores the fiscal devaluation hypothesis in a model of a monetary union characterised by national fiscal and supranational monetary policy. We show that a unilateral tax shift towards indirect taxes in one of the countries produces small but non-negligible long-run effects on output and consumption within and between the two countries only when international financial markets are perfectly integrated. In contrast to the existing literature, we find that short-run effects are not always amplified by nominal wage rigidities. We document also how short-run effects of the tax shift depend on the choice of the inflation index stabilised by the central bank and on whether the tax shift is anticipated.

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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 80038.

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Date of creation: 2013
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Handle: RePEc:zbw:vfsc13:80038
Contact details of provider: Web page: http://www.socialpolitik.org/
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