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Trade policies and fiscal devaluations

Christopher J. Erceg, Andrea Prestipino and Andrea Raffo ()

No 1347, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Fiscal devaluations—an increase in import tariffs and export subsidies (IX) or an increase in value-added taxes and payroll subsidies (VP)—have been shown to provide as much stimulus under fixed exchange rates as a currency devaluation. We find that if agents expect policies to be reversed and the tax pass-through is large, VP is contractionary and IX provides a modest boost. In our medium-scale DSGE model, both features are crucial in accounting for Germany’s underperformance in response to VP in 2007. These findings cast doubt on fiscal devaluations as a cyclical stabilization tool when monetary policy is constrained.

Keywords: Trade Policy; Fiscal Policy; Exchange Rates; Fiscal Devaluation (search for similar items in EconPapers)
JEL-codes: E32 F30 H22 (search for similar items in EconPapers)
Date: 2022-06-22
New Economics Papers: this item is included in nep-dge, nep-int and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1347

DOI: 10.17016/IFDP.2022.1347

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