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

Sandra Gomes and Pascal Jacquinot
Authors registered in the RePEc Author Service: Massimiliano Pisani

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: We assess the effects of a temporary fiscal devaluation enacted in Spain or Portugal on the trade balance 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 the consumption tax. Our main results are the following. First, in the first year following implementation, 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 also enacted 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-codes: F32 F47 H20 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-eec and nep-opm
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:ptu:wpaper:w201414

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