ON THE EFFECTIVENESS OF FISCAL DEVALUATIONS IN A MONETARY UNION

Anna Lipinska and Leopold von Thadden

Macroeconomic Dynamics, 2019, vol. 23, issue 8, 3424-3456

Abstract: This paper examines the effects of fiscal devaluations in a model of a monetary union characterized by national fiscal policies and supranational monetary policy. We show that a revenue-neutral permanent tax shift in one country, which raises its consumption tax to finance a cut to labor taxes, increases welfare of the monetary union in the long run. The distribution of gains among countries depends on their degree of financial integration. We also document that price rigidities result in short-run welfare costs.

Date: 2019
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Working Paper: On the (in)effectiveness of fiscal devaluations in a monetary union (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:23:y:2019:i:8:p:3424-3456_13

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