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On the (In)effectiveness of Fiscal Devaluations in a Monetary Union

Leopold von Thadden and Anna Lipinska ()

Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order from Verein für Socialpolitik / German Economic Association

Abstract: This paper explores the fiscal devaluation hypothesis in a model of a monetary union characterised by national fiscal and supranational monetary policy. We show that a unilateral tax shift towards indirect taxes in one of the countries produces small but non-negligible long-run effects on output and consumption within and between the two countries only when international financial markets are perfectly integrated. In contrast to the existing literature, we find that short-run effects are not always amplified by nominal wage rigidities. We document also how short-run effects of the tax shift depend on the choice of the inflation index stabilised by the central bank and on whether the tax shift is anticipated.

JEL-codes: E61 E63 F42 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-cba, nep-mac and nep-opm
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Working Paper: On the (in)effectiveness of fiscal devaluations in a monetary union (2012) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc13:80038

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