Fiscal Devaluations in a Monetary Union and the Extensive Margin of Trade

Stéphane Auray, Aurélien Eyquem and Xiaofei Ma

No 2014-11, Working Papers from Center for Research in Economics and Statistics

Abstract: We quantify the effects of fiscal devaluations within a monetary union model with endogenous entry and endogenous tradability. First, unilateral fiscal devaluations have large and permanent positive effects for countries that implement such policies, as they increase hours worked, consumption, GDP and produced varieties. Second, as the model supports positive cross-country comovements of GDP and consumption through endogenous tradability and the expansion of the trade sector, unilateral fiscal devaluations are not beggar-thy-neighbor policies. We find positive spillovers to other members of the monetary union in terms of economic activity as well as in terms of welfare. Both results stand in contrast with respect to the existing literature and suggest that fiscal devaluation is an efficient and non-aggressive policy option for governments that belong to a monetary union

Keywords: Fiscal devaluations; endogenous tradability; endogenous varieties; monetary union; taxes (search for similar items in EconPapers)
JEL-codes: E32 E52 F41 (search for similar items in EconPapers)
Pages: 27
Date: 2014-04
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Related works:
Working Paper: Fiscal Devaluations in a Monetary Union and the Extensive Margin of Trade (2015)
Working Paper: Fiscal Devaluations in a Monetary Union and the Extensive Margin of Trade (2015)
Working Paper: Fiscal Devaluations in a Monetary Union and the Extensive Margin of Trade (2015)
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