Fiscal devaluation and relative prices: evidence from the Euro area

Giampaolo Arachi () and Debora Assisi ()
Additional contact information
Giampaolo Arachi: Università del Salento
Debora Assisi: Università del Salento

International Tax and Public Finance, 2021, vol. 28, issue 3, No 8, 685-716

Abstract: Abstract The theoretical literature has long recognized that a fiscal devaluation, brought about by a budget-neutral shift from social security contributions towards value added tax (V-FD), could improve price competitiveness and help restore trade imbalances, especially for countries that cannot devaluate their currency. This paper provides evidence on the effects of a fiscal devaluation on the real effective exchange rate, the terms of trade and net exports. We focus on countries that joined the Euro Area in 1999 for which fiscal devaluation is a salient issue. We find that the responses are highly heterogeneous across countries and, on average, the estimates provide only a weak support to the theoretical predictions that a fiscal devaluation could affect the real effective exchange rate and the terms of trade. Consistently, we also find negligible results on the trade balance. We conclude that the potential of a V-FD should not be overemphasized, since its effects are rather limited on both relative prices and quantities.

Keywords: Fiscal devaluation; Exchange rate; Terms of trade; Internal competitiveness (search for similar items in EconPapers)
JEL-codes: E62 F45 H87 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://link.springer.com/10.1007/s10797-020-09623-4 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
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:kap:itaxpf:v:28:y:2021:i:3:d:10.1007_s10797-020-09623-4

Ordering information: This journal article can be ordered from
http://www.springer. ... ce/journal/10797/PS2

DOI: 10.1007/s10797-020-09623-4

Access Statistics for this article

International Tax and Public Finance is currently edited by Ronald B. Davies and Kimberly Scharf

More articles in International Tax and Public Finance from Springer, International Institute of Public Finance Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().