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Fiscal Devaluation in a Monetary Union

Author

Listed:
  • Philipp Engler

    (Freie Universität Berlin)

  • Giovanni Ganelli

    (IMF Regional Office for Asia and the Pacific)

  • Juha Tervala

    (University of Helsinki)

  • Simon Voigts

    (Humboldt-Universität zu Berlin)

Abstract

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.

Suggested Citation

  • Philipp Engler & Giovanni Ganelli & Juha Tervala & Simon Voigts, 2017. "Fiscal Devaluation in a Monetary Union," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 65(2), pages 241-272, June.
    • Handle: RePEc:pal:imfecr:v:65:y:2017:i:2:d:10.1057_s41308-016-0002-4
    DOI: 10.1057/s41308-016-0002-4
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    More about this item

    Keywords

    E32; E62; F32; F41;
    All these keywords.

    JEL classification:

    • 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
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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