Fiscal Devaluation in a Monetary Union

Philipp Engler, Giovanni Ganelli, Juha Tervala and Simon Voigts ()
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Simon Voigts: Humboldt-Universität zu Berlin

IMF Economic Review, 2017, vol. 65, issue 2, No 2, 272 pages

Abstract: Abstract Given that exchange rate devaluations are no longer available in a monetary union, fiscal devaluations are one potential way to address divergence in competitiveness and trade imbalances. Employing a DSGE model calibrated to the euro area, we quantify the international effects of a fiscal devaluation implemented as a revenue-neutral shift from employers’ social contributions to the value added tax. We find that a fiscal devaluation carried out in the South has a strong positive effect on output, which is five times larger than under a wage tax cut. However, the effect on the trade balance and the real exchange rate is mild. The negative effect on the North’s output is weak.

Keywords: E32; E62; F32; F41 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (29)

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Working Paper: Fiscal Devaluation in a Monetary Union (2014)
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DOI: 10.1057/s41308-016-0002-4

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