IMF Working Papers

Fiscal Devaluation in a Monetary Union

By Philipp Engler, Giovanni Ganelli, Juha Tervala, Simon Voigts

October 30, 2014

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Philipp Engler, Giovanni Ganelli, Juha Tervala, and Simon Voigts. Fiscal Devaluation in a Monetary Union, (USA: International Monetary Fund, 2014) accessed December 12, 2024
Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Using a DSGE model calibrated to the euro area, we analyze the international effects of a fiscal devaluation (FD) implemented as a revenue-neutral shift from employer's social contributions to the Value Added Tax. We find that a FD in ‘Southern European countries’ has a strong positive effect on output, but mild effects on the trade balance and the real exchange rate. Since the benefits of a FD are small relative to the divergence in competitiveness, it is best addressed through structural reforms.

Subject: Consumption, Fiscal devaluation, International trade, National accounts, Personal income tax, Tax policy, Taxes, Trade balance, Value-added tax

Keywords: Consumption, Currency union, Current account, Deficit in Southern European countries, Devaluation in Southern European countries, Euro area, Expenditure switching, Expenditure switching effect, Fiscal devaluation, Fiscal devaluation in Southern European countries, Fiscal policy, Households in Southern European countries, Imperfect competition, Open economy, Output effect, Personal income tax, Southern Europe, Southern European countries, Southern European countries of the Southern European countries, Trade balance, Trade balance effect, Value-added tax, WP

Publication Details

  • Pages:

    33

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2014/201

  • Stock No:

    WPIEA2014201

  • ISBN:

    9781484312131

  • ISSN:

    1018-5941