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Fiscal Devaluations in a Monetary Union and the Extensive Margin of Trade

Author

Listed:
  • Stéphane Auray

    (CREST-ENSAI, ULCO and CIRPEE)

  • Aurélien Eyquem
  • Xiaofei Ma

Abstract

We quantify the effects of fiscal devaluations within a monetary union model with endogenous entry and endogenous tradability. First, unilateral fiscal devaluations have large and permanent positive effects for countries that implement such policies, as they increase hours worked, consumption, GDP and produced varieties. Second, as the model supports positive cross-country comovements of GDP and consumption through endogenous tradability and the expansion of the trade sector, unilateral fiscal devaluations are not beggar-thy-neighbor policies. We find positive spillovers to other members of the monetary union in terms of economic activity as well as in terms of welfare. Both results stand in contrast with respect to the existing literature and suggest that fiscal devaluation is an efficient and non-aggressive policy option for governments that belong to a monetary union

Suggested Citation

  • Stéphane Auray & Aurélien Eyquem & Xiaofei Ma, 2014. "Fiscal Devaluations in a Monetary Union and the Extensive Margin of Trade," Working Papers 2014-11, Center for Research in Economics and Statistics.
    • Handle: RePEc:crs:wpaper:2014-11
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    Keywords

    Fiscal devaluations; endogenous tradability; endogenous varieties; monetary union; taxes;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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