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Fiscal Devaluation in a Small Open Economy

Author

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  • Robert Ambrisko

    (CERGE–EI, Czech National Bank)

Abstract

Fiscal devaluation, meaning a shift from payroll to indirect taxes, can be beneficial for a small open economy such as the Czech Republic. Using a structural fiscal DSGE model, I show that fiscal devaluation can boost real GDP growth by 0.5 percentage points in the first year, when a budget-neutral tax shift of the magnitude of 1% of GDP occurs from direct taxes to consumption tax. I also calculate fiscal multipliers for several revenue and expenditure categories of the government budget, the largest of which (after the first year) are government consumption (0.6), government investment (0.5), and social security contributions paid by employers (0.4). These results corroborate the hypothesis that the government can easily boost the economy by adjusting fiscal instruments appropriately.

Suggested Citation

  • Robert Ambrisko, 2019. "Fiscal Devaluation in a Small Open Economy," Russian Journal of Money and Finance, Bank of Russia, vol. 78(1), pages 67-88, March.
    • Handle: RePEc:bkr:journl:v:78:y:2019:i:1:p:67-88
    DOI: 10.31477/rjmf.201901.67
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    References listed on IDEAS

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    More about this item

    Keywords

    Bayesian estimation; DSGE; fiscal devaluation; fiscal multipliers; fiscal policy; taxation;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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