Fiscal Devaluations

Oleg Itskhoki, Gita Gopinath and Emmanuel Farhi

No 406, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: The crisis in the Euro area has partly been blamed on the inability of individual countries to devalue their currencies. In this paper we evaluate the extent to which fiscal instruments can be used to replicate the behavior of an exchange rate devaluation in a New Keynesian Open Economy environment. We perform the analysis under alternate assumptions of producer and local currency pricing. We show that a combination of uniform import tariffs, export subsidies, consumption and labor taxes can generate allocations identical to those that follow an exchange rate devaluation. The specifics of which taxes are needed depend on the completeness of asset markets.

Date: 2011
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Related works:
Journal Article: Fiscal Devaluations (2014)
Working Paper: Fiscal Devaluations (2014)
Working Paper: Fiscal devaluations (2012)
Working Paper: Fiscal devaluations (2012)
Working Paper: Fiscal Devaluations (2011)
Working Paper: Fiscal Devaluations (2011)
Working Paper: Fiscal Devaluations
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed011:406

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