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Fiscal Devaluation with Endogenous Markups: Productivity and Welfare

Pascal Belan (), Clément Carbonnier and Martine Carré

Scandinavian Journal of Economics, 2021, vol. 123, issue 4, 1159-1189

Abstract: We study fiscal devaluation (i.e., revenue‐neutral shift from payroll to consumption tax) in a two‐country model of international trade. We analyze how such a policy modifies competition between heterogeneous producers, endogenous markups, and the allocation of inputs. We show that fiscal devaluation increases (resp. decreases) consumption in the net importing (resp. net exporting) country, regardless of which country implements the policy. Numerical illustrations suggest that fiscal devaluation is a deflationary policy. In most cases, input resources are reallocated to less productive firms, partly because of the deformation of the profit structure along the distribution of productivity.

Date: 2021
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Working Paper: Fiscal Devaluation with Endogenous Markups: Productivity and Welfare (2021)
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