Fiscal devaluations
Emmanuel Farhi,
Gita Gopinath and
Oleg Itskhoki
No 12-10, Working Papers from Federal Reserve Bank of Boston
Abstract:
The authors show that even when the exchange rate cannot be devalued, a small set of conventional fiscal policy instruments can robustly replicate the real allocations attained under a nominal exchange rate devaluation in a standard New Keynesian open economy environment. They perform the analysis under alternative pricing assumptions?producer or local currency pricing along with nominal wage stickiness, under alternative asset market structures, and for anticipated and unanticipated devaluations. There are two types of fiscal policies equivalent to an exchange rate devaluation: one, a uniform increase in the import tariff and export subsidy, and two, an increase in the value-added tax and a uniform reduction in the payroll tax. When the devaluations are anticipated, these policies need to be supplemented with a reduction in the consumption tax and an increase in income taxes. These policies have zero impact on fiscal revenues. In certain cases equivalence requires in addition a partial default on foreign bondholders. They discuss the issues regarding implementation of these policies, in particular in the case of a currency union.
Keywords: Fiscal policy; Foreign exchange rates (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-opm
References: Add references at CitEc
Citations: View citations in EconPapers (6)
Downloads: (external link)
http://www.bostonfed.org/economic/wp/wp2012/wp1210.htm (text/html)
http://www.bostonfed.org/economic/wp/wp2012/wp1210.pdf (application/pdf)
Related works:
Journal Article: Fiscal Devaluations (2014) ![Downloads](/downloads_econpapers.gif)
Working Paper: Fiscal Devaluations (2014) ![Downloads](/downloads_econpapers.gif)
Working Paper: Fiscal devaluations (2012) ![Downloads](/downloads_econpapers.gif)
Working Paper: Fiscal Devaluations (2011) ![Downloads](/downloads_econpapers.gif)
Working Paper: Fiscal Devaluations (2011) ![Downloads](/downloads_econpapers.gif)
Working Paper: Fiscal Devaluations (2011)
Working Paper: Fiscal Devaluations ![Downloads](/downloads_econpapers.gif)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:fip:fedbwp:12-10
Ordering information: This working paper can be ordered from
boston.library@bos.frb.org
Access Statistics for this paper
More papers in Working Papers from Federal Reserve Bank of Boston Contact information at EDIRC.
Bibliographic data for series maintained by Catherine Spozio (catherine.spozio@bos.frb.org).