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Fiscal devaluation and labor market frictions in a monetary union

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Abstract

We evaluate the macroeconomic and labor market impact of a fiscal devaluation in one region of a monetary union. We simulate a monetary-union model of the euro area (EA) and the world economy featuring search-and-matching labor markets. We obtain the following results. First, a region-specific devaluation improves trade-competitiveness, macroeconomic conditions, and employment. Second, a permanent regional fiscal devaluation has more expansionary labor-intensive effects than lowering the capital income tax rate and increasing the consumption tax rate. Third, simultaneous EA-wide and world-wide fiscal devaluations have expansionary effects on macroeconomic and labor market conditions. Fourth, a EA accommodative monetary policy enhances the expansionary effects of the EA-wide fiscal devaluation on the generic Member State; to the opposite, the Member State faces lower economic activity and employment if the world-wide fiscal devaluation is accompanied by an accommodative monetary stance outside the EA.

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  • Burlon, L. & Notarpietro, A. & Pisani, M., 2021. "Fiscal devaluation and labor market frictions in a monetary union," Economic Modelling, Elsevier, vol. 97(C), pages 135-156.
    • Handle: RePEc:eee:ecmode:v:97:y:2021:i:c:p:135-156
    DOI: 10.1016/j.econmod.2021.01.004
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    2. Hinterlang, Natascha & Martin, Anika & Röhe, Oke & Stähler, Nikolai & Strobel, Johannes, 2022. "Using energy and emissions taxation to finance labor tax reductions in a multi-sector economy," Energy Economics, Elsevier, vol. 115(C).
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    4. Hinterlang, Natascha & Martin, Anika & Röhe, Oke & Stähler, Nikolai & Strobel, Johannes, 2021. "Using energy and emissions taxation to finance labor tax reductions in a multi-sector economy: An assessment with EMuSe," Discussion Papers 50/2021, Deutsche Bundesbank.

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    More about this item

    Keywords

    Fiscal devaluation; Labor market; Dynamic general equilibrium;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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