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Effects of fiscal devaluation in a closed economy

Jin Sui

VfS Annual Conference 2020 (Virtual Conference): Gender Economics from Verein für Socialpolitik / German Economic Association

Abstract: Fiscal devaluation works as an alternative instrument to monetary de- valuation, helping countries to regain competitiveness in a monetary union. Focusing on a closed economy, this paper analyzes its effects in a dynamic framework. In the case of an increasing relative love for variety, fiscal de- valuation leads to a decrease in individual consumption, an increase in the number of firms and decreases in firm markups, which are pro-competitive effects in the short run. In the long run, steady states can exist in models using non-CES utility functions, for example, quadratic linear, Stone-Geary and CARA function. The increase in the consumption tax can attract more firms entering the market, which is supported by the innovation activities, and finally help the economy reach the social optimal status.

Keywords: fiscal devaluation; relative love of variety; non-CES utility function (search for similar items in EconPapers)
JEL-codes: H20 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-mac and nep-upt
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