Trade Policies and Fiscal Devaluations

Christopher Erceg, Andrea Prestipino and Andrea Raffo

American Economic Journal: Macroeconomics, 2023, vol. 15, issue 4, 104-40

Abstract: Fiscal devaluations—an increase in import tariffs and export subsidies (IX) or an increase in value-added taxes and payroll subsidies (VP)—have been shown to provide as much stimulus under fixed exchange rates as a currency devaluation. We find that if agents expect policies to be reversed and the tax pass-through is large, VP is contractionary and IX provides a modest boost. In our medium-scale DSGE model, both features are crucial in accounting for Germany's underperformance in response to VP in 2007. These findings cast doubt on fiscal devaluations as a cyclical stabilization tool when monetary policy is constrained.

JEL-codes: E32 E52 E62 F13 F33 H20 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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DOI: 10.1257/mac.20210163

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