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Fiscal devaluation and real exchange rates in the Euro area: Some econometric insights

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  • Marina Tkalec
  • Maruška Vizek
  • Goran Vukšić

Abstract

We explore whether a fiscal devaluation, that is, a reduction in employers’ social security contributions and an increase in value added tax, affects two indicators of bilateral real exchange rates in the euro area: one based on unit labor costs, and another based on consumer prices. We find that, in the short term, cuts in employers’ contributions depreciate real exchange rates based on unit labor costs, while value added tax hikes appreciate real exchange rates based on consumer prices. In the long run, a value added tax increase also appreciates the real exchange rates based on unit labor costs.

Suggested Citation

  • Marina Tkalec & Maruška Vizek & Goran Vukšić, 2019. "Fiscal devaluation and real exchange rates in the Euro area: Some econometric insights," Review of International Economics, Wiley Blackwell, vol. 27(2), pages 694-710, May.
    • Handle: RePEc:bla:reviec:v:27:y:2019:i:2:p:694-710
    DOI: 10.1111/roie.12393
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    Cited by:

    1. Ciżkowicz, Piotr & Radzikowski, Bartosz & Rzońca, Andrzej & Wojciechowski, Wiktor, 2020. "Fiscal devaluation and economic activity in the EU," Economic Modelling, Elsevier, vol. 88(C), pages 59-81.
    2. Hasim Akca & Oguzhan Bozatli, 2020. "Fiscal devaluation and net export: dynamic panel data analysis on the Euro Area," Applied Economics Letters, Taylor & Francis Journals, vol. 27(18), pages 1500-1504, October.
    3. Giampaolo Arachi & Debora Assisi, 2021. "Fiscal devaluation and relative prices: evidence from the Euro area," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(3), pages 685-716, June.
    4. Mario Holzner & Maruška Vizek & Goran Vukšić, 2022. "Wage Bargaining Coordination, Taxation and Labor Costs: The Effects of Fiscal Devaluation," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 64(2), pages 324-349, June.

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