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.
CITATION STYLE
Engler, P., Ganelli, G., Tervala, J., & Voigts, S. (2017). Fiscal Devaluation in a Monetary Union. IMF Economic Review. Palgrave Macmillan Ltd. https://doi.org/10.1057/s41308-016-0002-4
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