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The Interaction of Direct and Indirect Taxes: The Prospects of Fiscal Devaluation

Michael Stimmelmayr ()

No 8629, EcoMod2015 from EcoMod

Abstract: In this paper we derive the theoretical underpinning of fiscal devaluation (i.e. the reduction of direct taxes combined with a (revenue-neutral) increase in indirect taxes in order to mimic the real outcome of a nominal exchange rate devaluation.) in the framework of a neoclassical growth model. In addition, we calibrate the model to the German economy and quantify the effects associated with the fiscal devaluation carried out in Germany since 2005.A computable general equilibrium growth model calibrated to the German economy. The model accounts for endogenous production and labour supply as well as international trade.The simulation results show that due to the reform a significant amount of revenues were raised without generating a negative effect on economic growth. Further, the reform lead to a significant improvement of the trade balance (by around 3.1 percentage points in the short-run) thereby confirming the theoretical considerations associated with fiscal devaluation.

Keywords: Germany; Public finance; Trade issues (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge
Date: 2015-07-01
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Handle: RePEc:ekd:008007:8629