Bulletin n. 1/2017 | ||
June 2017 | ||
Philipp Engler, Giovanni Ganelli, Juha Tervala, Simon Voigts |
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Fiscal Devaluation in a Monetary Union | ||
in IMF Economic Review , Volume 65, Issue 2 , 2017 , 241-272 | ||
Given that exchange rate devaluations are no longer available in a monetary union, fiscal devaluations are one potential way to address divergence in competitiveness and trade imbalances. Employing a DSGE model calibrated to the euro area, we quantify the international effects of a fiscal devaluation implemented as a revenue-neutral shift from employers’ social contributions to the value added tax. We find that a fiscal devaluation carried out in the South has a strong positive effect on output, which is five times larger than under a wage tax cut. However, the effect on the trade balance and the real exchange rate is mild. The negative effect on the North’s output is weak. | ||