EconPapers    
Economics at your fingertips  
 

Fiscal Devaluations

Emmanuel Farhi, Gita Gopinath and Oleg Itskhoki

No 17662, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We show that even when the exchange rate cannot be devalued, a small set of conventional fiscal instruments can robustly replicate the real allocations attained under a nominal exchange rate devaluation in a dynamic New Keynesian open economy environment. We perform the analysis under alternative pricing assumptions- producer or local currency pricing, along with nominal wage stickiness; under arbitrary degrees of asset market completeness and for general stochastic sequences of devaluations. There are two types of fiscal policies equivalent to an exchange rate devaluation-one, a uniform increase in import tariff and export subsidy, and two, a value-added tax increase and a uniform payroll tax reduction. When the devaluations are anticipated, these policies need to be supplemented with a consumption tax reduction and an income tax increase. These policies are revenue neutral. In certain cases equivalence requires, in addition, a partial default on foreign bond holders. We discuss the issues of implementation of these policies, in particular, under the circumstances of a currency union.

JEL-codes: E32 E60 F30 (search for similar items in EconPapers)
Date: 2011-12
New Economics Papers: this item is included in nep-cba, nep-mac and nep-opm
Note: EFG IFM ITI ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

Published as Emmanuel Farhi & Gita Gopinath & Oleg Itskhoki, 2014. "Fiscal Devaluations," Review of Economic Studies, Oxford University Press, vol. 81(2), pages 725-760.

Downloads: (external link)
http://www.nber.org/papers/w17662.pdf (application/pdf)

Related works:
Journal Article: Fiscal Devaluations (2014) Downloads
Working Paper: Fiscal Devaluations (2014) Downloads
Working Paper: Fiscal devaluations (2012) Downloads
Working Paper: Fiscal devaluations (2012) Downloads
Working Paper: Fiscal Devaluations (2011) Downloads
Working Paper: Fiscal Devaluations (2011)
Working Paper: Fiscal Devaluations Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:17662

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w17662

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2025-03-22
Handle: RePEc:nbr:nberwo:17662