Hostname: page-component-78c5997874-fbnjt Total loading time: 0 Render date: 2024-11-10T16:36:36.713Z Has data issue: false hasContentIssue false
  • English
  • Français

ON THE EFFECTIVENESS OF FISCAL DEVALUATIONS IN A MONETARY UNION

Published online by Cambridge University Press:  19 July 2018

Anna Lipińska  and
Leopold von Thadden
Anna Lipińska*
Affiliation:
Federal Reserve Board
Leopold von Thadden
Affiliation:
European Central Bank
*
Address correspondence to: Anna Lipińska, Division of International Finance, Federal Reserve Board, 20th Street and Constitution Avenue N.W., DC 20551, USA; e-mail: anna.lipinska@frb.gov.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper examines the effects of fiscal devaluations in a model of a monetary union characterized by national fiscal policies and supranational monetary policy. We show that a revenue-neutral permanent tax shift in one country, which raises its consumption tax to finance a cut to labor taxes, increases welfare of the monetary union in the long run. The distribution of gains among countries depends on their degree of financial integration. We also document that price rigidities result in short-run welfare costs.

Keywords

Fiscal RegimesMonetary PolicyCurrency Union
Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 8 , December 2019 , pp. 3424 - 3456
Copyright
Copyright © Cambridge University Press 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

Comments on an early draft by Kosuke Aoki, Bianca De Paoli, Philipp Harms, Jan IntVeld, Christophe Kamps, Werner Roeger, Jean-Pierre Vidal, and seminar participants at the Royal Economic Society Meeting 2009 (University of Surrey), the European Economic Association Meeting 2009 (Barcelona), the European Central Bank, DG ECFIN (Brussels), the University of Aachen, and the Brussels Tax Forum 2012 are gratefully acknowledged.

The views expressed in this paper are those of the authors and do not necessarily reflect those of the Federal Reserve Board or the European Central Bank.

References

REFERENCES

Altissimo, F., Benigno, P., and Rodriguez Palenzuela, D. (2011) Long-run determinants of inflation differentials in a currency area. Open Economies Review 22, 189–233.Google Scholar
Attinasi, M., Prammer, D., Stahler, N., Tasso, M., and Parys, S. V. (2016) Budget-Neutral Labor Tax Wedge Reductions: A Simulation-Based Analysis for Selected Euro Area Countries. Deutsche Bundesbank Discussion Papers 26.Google Scholar
Baxter, M. and Crucini, M. J. (1995) Business cycles and the asset structure of foreign trade. International Economic Review 36 (4), 821–854.Google Scholar
Benigno, P. (2004) Optimal monetary policy in a currency area. Journal of International Economics 63 (2), 293–320.Google Scholar
Bosca, J., Domenech, R., and Ferri, J. (2013) Fiscal devaluations in EMU. Review of Public Economics 206, 27–56.Google Scholar
Calmfors, L. (1998) Macroeconomic policy, wage setting, and employment. What difference does the EMU make? Oxford Review of Economic Policy 14, 125–151.Google Scholar
Calvo, G. (1983) Staggered prices in a utility-maximizing framework. Journal of Monetary Economics 12, 383–398.Google Scholar
Campolmi, A. (2014) Which inflation to target? A small open economy with sticky wages. Macroeconomic Dynamics 18 (1), 145–174.Google Scholar
Chari, V. V., Kehoe, P. J., and McGrattan, E. R. (2002) Can sticky price models generate volatile and persistent real exchange rates? Review of Economic Studies 69, 533–563.Google Scholar
Christopoulou, R. and Vermeulen, P. (2012) Markups in the euro area and the US over the period 1981? 2004: A comparison of 50 sectors. Empirical Economics 42 (1), 53–77.Google Scholar
Coenen, G., McAdam, P., and Straub, R. (2008) Tax reform and labour-market performance in the euro area: A simulation-based analysis using the new area-wide model. Journal of Economic Dynamics and Control 32, 2543–2583.Google Scholar
Corsetti, G. and Pesenti, P. (2001) Welfare and macroeconomic interdependence. Quarterly Journal of Economics 116, 421–45.Google Scholar
de Mooij, R. and Keen, M. (2013) Fiscal Devaluation and Fiscal Consolidation: The VAT in Troubled Times. In Alesina, A. and Giavazzi, F. (eds.), Fiscal Policy after the Financial Crisis. Chicago: University of Chicago Press.Google Scholar
Druant, M., Fabiani, S., Kezdi, G., Lamo, A., Martins, F., and Sabbatini, R. (2009) How are Firms' Wages and Prices Linked: Survey Evidence in Europe. European Central Bank Working Paper Series 1084.Google Scholar
Duarte, M. and Wolman, A. (2008) Fiscal policy and regional inflation in a currency area. Journal of International Economics 74 (2), 384–401.Google Scholar
ECB (2013) Monthly Bulletin, December. Technical report, European Central Bank.Google Scholar
EEAG (2013) The EEAG Report on the European Economy. Technical report, CESifo, Munich.Google Scholar
Engler, P., Gannelli, G., Tervala, J., and Voigts, S. (2014) Fiscal Devaluation in a Monetary Union. IMF Working Paper Series 201.Google Scholar
Erceg, C., Henderson, D., and Levin, A. (2000) Optimal monetary policy with staggered wage and price contracts. Journal of Monetary Economics 46, 281–313.Google Scholar
European Commission (2013) Tax Reforms in EU Member States. Tax Policy Challenges for Economic Growth and Fiscal Sustainability. European Economy 5.Google Scholar
European Commission (2015) Tax Reforms in EU Member States. Tax Policy Challenges for Economic Growth and Fiscal Sustainability. Taxation Papers 58.Google Scholar
Farhi, E., Gopinath, G., and Itskhoki, O. (2014) Fiscal devaluations. Review of Economic Studies 81 (2), 725–760.Google Scholar
Feenstra, R. C., Luck, P. A., Obstfeld, M., and Russ, K. N. (2018) In search of the Armington elasticity. Review of Economics and Statistics 100 (1), 135–150.Google Scholar
Feldstein, M. and Krugman, P. (1990) International trade effects of value added taxation. In Razin, A. and Slemrod, J. (eds.), Taxation and the Global Economy, pp. 263–282. Chicago: University of Chicago Press.Google Scholar
Ferrero, A. (2009) Fiscal and monetary rules for a currency area. Journal of International Economics 77, 1–10.Google Scholar
Leeper, E., Walker, T., and Yang, S. (2008) Fiscal Foresight: Analytics and Econometrics. NBER Working Paper 14028.Google Scholar
Poterba, J., Rotemberg, J., and Summers, L. (1986) A tax-based test for nominal rigidities. American Economic Review 76 (4), 659–675.Google Scholar
Prescott, E. (2006) Nobel lecture: The transformation of macroeconomic policy and research. Journal of Political Economy 114 (2), 203–235.Google Scholar
Schmitt-Grohe, S. and Uribe, M. (2003) Closing small open economy models. Journal of International Economics 61, 163–185.Google Scholar
Stockman, A. and Tesar, L. (1995) Tastes and technology in a two-country model of the business cycle: Explaining international comovements. American Economic Review 1, 168–85.Google Scholar
Tille, C. (2001) The role of consumption substitutability in the international transmission of monetary shocks. Journal of International Economics 53, 421–444.Google Scholar
Yang, S. (2005) Quantifying tax effects under policy foresight. Journal of Monetary Economics 52, 1557–1568.Google Scholar