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Fiscal devaluation and labor market frictions in a monetary union

Lorenzo Burlon, Alessandro Notarpietro and M. Pisani
Authors registered in the RePEc Author Service: Massimiliano Pisani and Michael J. Pisani ()

Economic Modelling, 2021, vol. 97, issue C, 135-156

Abstract: We evaluate the macroeconomic and labor market impact of a fiscal devaluation in one region of a monetary union. We simulate a monetary-union model of the euro area (EA) and the world economy featuring search-and-matching labor markets. We obtain the following results. First, a region-specific devaluation improves trade-competitiveness, macroeconomic conditions, and employment. Second, a permanent regional fiscal devaluation has more expansionary labor-intensive effects than lowering the capital income tax rate and increasing the consumption tax rate. Third, simultaneous EA-wide and world-wide fiscal devaluations have expansionary effects on macroeconomic and labor market conditions. Fourth, a EA accommodative monetary policy enhances the expansionary effects of the EA-wide fiscal devaluation on the generic Member State; to the opposite, the Member State faces lower economic activity and employment if the world-wide fiscal devaluation is accompanied by an accommodative monetary stance outside the EA.

Keywords: Fiscal devaluation; Labor market; Dynamic general equilibrium (search for similar items in EconPapers)
JEL-codes: F32 F47 H20 (search for similar items in EconPapers)
Date: 2021
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Working Paper: Fiscal devaluation and labour market frictions in a monetary union (2019) Downloads
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DOI: 10.1016/j.econmod.2021.01.004

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