Fiscal Devaluation in a Monetary Union

Abstract

Between 1999 and the onset of the economic crisis in 2008 real exchange rates in Greece, Ireland, Italy, Portugal and Spain appreciated relative to the rest of the euro area. This divergence in competitiveness was reected in the emergence of current account imbalances. Given that exchange rate devaluations are no longer available in a monetary union, one potential way to address such imbalances is through a scal devaluation. We use a DSGE model calibrated to the euro area to investigate the impact of a scal devaluation, modeled as a revenue-neutral shift from employers' social contributions to the Value Added Tax. We nd that a scal devaluation carried out in`Southern European countries' has a strong positive eect on output, but a mild eect on the trade balance of these countries. In addition, the negative eect on`Central-Northern countries' output is weak.

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

“…They show that a fiscal devaluation may be effective in stimulating output, hours worked and the trade balance. Engler, Ganelli, Tervala & Voigts (2014) propose a New-Keynesian model with Ricardian and Non-Ricardian households and sticky wages and find similar results.…”

Local air pollution and global climate change taxes: a distributional analysis for the case of Spain

“…For Eurozone countries, de Mooij and Keen (2012) find that a shift of 1% of GDP from social contributions to indirect taxes would increase net exports by around 0.9%À4% of GDP. For southern countries, Engler et al (2014) show that a fiscal devaluation of 1% of GDP increases output by 0.9%À1.5% of GDP. For the Spanish case, Bosc a, Dom enech and Ferri (2014) analyse a 3.5% reduction in the effective contribution to social security paid by the employer and a 2% increase in the effective VAT rate.…”

Composition of trade flows and the effectiveness of fiscal devaluation

“…A series of studies of such a tax shift have been conducted in recent years, shedding more light on its effectiveness. While theoretical and simulation research (e.g., EC, ; Engler, Ganelli, Tervala, & Voigts, ; Gomes, Jacquinot, & Pisani, ) has analysed the impact of fiscal devaluation on growth, employment and trade balances, the empirical studies (Bernoth, Burauel, & Engler, ; De Mooij & Keen, ; Holzner, Tkalec, Vizek, & Vukšić, ) have focused mainly on the impact of this tax shift on trade balances. The interest in the effects on external balances might have been augmented by strongly diverging developments in external competitiveness within the EU, and especially within the euro area, before the crisis, as measured by the real exchange rates (see, e.g., Koske, ).…”

“…The interest in the effects on external balances might have been augmented by strongly diverging developments in external competitiveness within the EU, and especially within the euro area, before the crisis, as measured by the real exchange rates (see, e.g., Koske, ). These developments were largely mirrored in trade imbalances, with some Member States experiencing large deficits and others considerable surpluses (Engler et al., ). The available research suggests that the appreciated real exchange rates did contribute to large trade deficits in some EU countries, although the causes of such developments could have been manifold (Chen et al., ; Kang & Shambaugh, ).…”

“…A cut in SCR, on the other hand, should lower marginal labour costs for domestic producers, enabling them to decrease their producer prices, thus leading to higher exports and import substitution (and higher labour demand at lower labour costs). Related simulations and empirical studies have mostly found positive short‐term effects on the trade balance, with the magnitude of the effect depending on some country‐specific factors, such as trade openness, elasticity of substitution between domestic and foreign goods, and degrees of price and wage rigidities (Engler et al., ; Gomes et al., ; Holzner et al., ).…”