Optimal Fiscal Devaluation

Francois Langot, Lise Patureau () and Thepthida Sopraseuth

No 6624, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We study fiscal devaluation in a small-open economy with labor market search frictions. Our analysis shows the key role of both dimensions in shaping the optimal tax scheme. By reducing labor market distortions, the tax reform is welfare-improving. Yet, as it makes imports more expensive, fiscal devaluation lowers the agents' purchasing power, which is welfare-reducing. These contrasting effects give rise to an optimal tax scheme. Besides, transition matters. If the economy is better off in the long run, the required transitional saving effort increases the cost of the reform, thereby calling for a moderate magnitude of fiscal devaluation.

Keywords: fiscal devaluation; consumption tax; payroll tax; labor market search; small open economy; Dynamic General Equilibrium model (search for similar items in EconPapers)
JEL-codes: E27 E62 H21 J38 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2012-06
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
References: View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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Related works:
Working Paper: Optimal Fiscal Devaluation (2012)
Working Paper: Optimal Fiscal Devaluation (2012)
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