Fiscal Devaluation in a Monetary Union
IMF Working Papers, October 30, 2014
Source details
- Canonical URL
- Fiscal Devaluation in a Monetary Union
Other formats
Bibliographic details
- Authors: Philipp Engler, Giovanni Ganelli, Juha Tervala, Simon Voigts
- Published: October 30, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484312131.001
Summary and research question
- Using a DSGE model calibrated to the euro area, the paper analyzes the international effects of a fiscal devaluation (FD) implemented as a revenue-neutral shift from employer's social contributions to the Value Added Tax.
- Central finding: 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.
- Policy implication highlighted in the paper: since the benefits of a FD are small relative to the divergence in competitiveness, it is best addressed through structural reforms.
Key findings and effects
- Output effect:
- A FD in ‘Southern European countries’ produces a strong positive effect on output.
- Trade balance and real exchange rate effects:
- The effects on the trade balance are described as mild.
- The effects on the real exchange rate are described as mild.
- Comparative assessment:
- The benefits of a FD are small relative to the divergence in competitiveness faced by the affected countries.
Policy recommendations and interpretation
- Fiscal devaluation design:
- FD implemented as a revenue-neutral shift from employer's social contributions to the Value Added Tax is the policy examined.
- Recommended response to competitiveness divergence:
- Structural reforms are recommended as the preferable approach to address competitiveness divergence, given the limited benefits of FD relative to the size of the divergence.
Subjects and keywords (as listed)
- Subjects: 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