Fiscal Devaluation and Structural Gaps

Abstract

1 RésuméCet article détermine le régime fiscal optimal dans une économie ouverte caractérisée par des inefficiences structurelles liées au marché du travail et à la taille de l'Etat. De façon analytique, nous montrons d'abord que la réévaluation fiscale permet d'exploiter l'externalité des termes de l'échange et d'atténuer l'impact d'une dépense publique excessive. Toutefois, si les rigidités sur le marché du travail sont suffisamment grandes, la dévaluation fiscale peut être préférable. Deuxièmement, nous fournissons une évaluation quantitative d'une réforme adoptant cette fiscalité optimale en utilisant la France comme économie de référence. Nos résultats montrent que la France bénéficierait plus d'une dé-valuation fiscale qu'une économie où le marché du travail est plus flexible, comme les États-Unis. Nous montrons également que les gains de bien-être de la réforme fiscale dépendent essentiellement de la capacité du gouvernement à revenir à sa taille optimale.Mots clés: Taxes sur la consommation, cotisations sociales, allocation de Ramsey, appariement sur le marché du travail, économie ouverte, dépenses publiques.Codes JEL: E27, E62, H21, J38 AbstractThe paper characterizes the optimal tax scheme in an open economy with structural inefficiencies on the labor market and on government size. On analytical grounds first, we show that the economy can use fiscal revaluation to exploit the terms of trade externality and to dampen the impact of an excessive public spending. However, if real labor market rigidities are large enough, fiscal devaluation may be desirable. Second, we provide a quantitative assessment of the optimal tax reform using France as the benchmark economy. Our results show that France would benefit more from fiscal devaluation than a economy where the labor market is more flexible, as the US. We also show that the welfare gains from the optimal tax reform crucially depend on the ability of the government to target its optimal size.Keywords: consumption tax, payroll tax, Ramsey allocation, labor market search, open economy, public spending. Non-technical summaryFiscal devaluation has been received a lot of attention in the recent years. This policy consists to use "unilateral fiscal policy to generate the same real outcomes as those following a nominal exchange rate devaluation, while keeping the nominal exchange rate fixed". In accordance with this nominal approach, the New-Keynesian economists study policies which can affect real terms of trade in the short run. A particular combination of an increase in value-added taxes along with employment subsidy allows decentralized markets to achieve this objective. As such, fiscal devaluation has been implemented in many European countries in the recent years (Denmark (1988), Sweden (1993), Germany (2006) or France (2012)). This literature only focuses on short-run performances of the tax reform in reducing the "Okun gaps". This paper supplements these studies by emphasizing the medium-run effects of fiscal devaluation in economies featuring real rigidit...

Fiscal Devaluations in EMU

“…This means that the tax wedge increases more using payroll taxes and, thus, generates larger distortionary effects (see a similar argument in Langot et al, 2012). In addition to this argument based on the tax base, the different effects of labour and consumption taxes can be explained by means of their influence on the behaviour of agents.…”

“…This is also the approach in Langot et al (2012). This assumption is also more realistic from a policy-maker point of view.…”

“…In this paper we focus on the effects of fiscal devaluation on employment and output. Using a similar small open economy model with equilibrium unemployment calibrated for the French economy, Langot, Patureauz and Sopraseuth (2012) focus on the welfare effects of fiscal devaluations.…”

Short-Term Pain for Long-Term Gain: Market Deregulation and Monetary Policy in Small Open Economies

“…45 Note that the reform package still implies a worsening of the current account for over two years, as the home country borrows to finance increased firm creation. 46 This would no longer be the case if reforms instead turned out to have deflationary effects, as in Eggertsson (2010), where supply-side policies are assumed to boost only current supply, or Eggertsson, Ferrero, and Raffo (2014) As noted above, differences in the characteristics of monetary policy, conducted by means of simple, empirically relevant rules, do not appear to play a major role for the dynamic adjustment to labor market reforms (Figures 1-3). This is essentially because transition dynamics are largely driven by firm and consumer expectations of the long-run effects of reforms, which do not depend on the conduct of monetary policy as specified in this paper.…”

Competitive tax reforms in a monetary union with endogenous entry and tradability

“…Both features raise the expected profits of foreign firms and boost foreign business creation. This rise in the extensive margin of 3 Relatedly, Langot, Patureau & Sopraseuth (2014) analyze the optimal taxation scheme in an open economy with search labor market frictions. 4 A recent study by the European Commission (2013) uses general equilibrium models to quantify the effects of fiscal devaluations and concludes that fiscal devaluations induce an expansion of employment and GDP, while the trade balance reacts positively in the short-run.…”