Fiscal devaluation in the euro area: a model-based analysis

Pascal Jacquinot, Massimiliano Pisani and Sandra Gomes

No 1725, Working Paper Series from European Central Bank

Abstract: We assess the effects on trade balance of a temporary fiscal devaluation enacted by Spain or Portugal by simulating EAGLE, a large-scale multi-country dynamic general equilibrium model of the euro area. Social contributions paid by firms are reduced by 1 percent of GDP for four years and are financed by increasing consumption tax. Our main results are the following. First, the Spanish trade balance improves by 0.5 percent of GDP, the (before-consumption tax) real exchange rate depreciates by 0.7 percent and the terms of trade deteriorate by 1 percent. Second, similar results are obtained in the case of Portugal. Third, the trade balance improves when the fiscal devaluation is enacted also in the rest of the euro area, albeit to a lower extent than in the case of unilateral (country-specific) implementation. Fourth, quantitative results crucially depend on the degree of substitutability between domestic and imported tradables. JEL Classification: F32, F47, H20

Keywords: dynamic general equilibrium modeling; fiscal devaluation; trade deficit (search for similar items in EconPapers)
Date: 2014-08
New Economics Papers: this item is included in nep-dge, nep-eec and nep-opm
Note: 725400
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Journal Article: Fiscal devaluation in the euro area: A model-based analysis (2016)
Working Paper: Fiscal devaluation in the euro area: a model-based analysis (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20141725

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