Fiscal Devaluations in EMU

Abstract

SummaryWe use a small open economy general equilibrium model to analyse the effects of a fiscal devaluation in an EMU country. The model has been calibrated for the Spanish economy, which is a good example of the advantages of a change in the tax mix given that its tax system shows a positive bias in the ratio of social security contributions over consumption taxes. The preliminary empirical evidence for European countries shows that this bias was negatively correlated with the current account balance in the expansionary years leading up to the 2009 crisis, a period when many EMU members accumulated large external imbalances. Our simulation results point to significant positive effects of a fiscal devaluation on GDP and employment similar to the ones that could be obtained with an exchange rate devaluation. However, although the effects in terms of GDP and employment are similar, the composition effects of fiscal and nominal devaluations are not alike. In both cases, there is an improvement in net exports, but the effects on domestic and external demand are quite different.

Renta básica universal y renta mínima: ¿soluciones para el futuro?

“…Además, para poder obtener unos resultados más robustos habría que incorporar al cálculo toda una serie de potenciales efectos, como los explicados a lo largo de este artículo, así como los efectos provocados por la redistribución de las rentas. Boscá et al (2013) estiman que en España una subida del 1 % del PIB en impuestos hace caer el PIB un 1,3 %, lo que dispararía los efectos indirectos de la renta básica universal.…”

Competitive Tax Reforms in a Monetary Union with Endogenous Entry and Tradability

“…Their scope is therefore limited to the effects on the intensive margin of trade, i.e. expenditure switching and international wealth effects (see Bosca et al (2013), Lipinska & von Thadden (2012) or Langot & Lemoine (2014)). Since Ghironi & Melitz (2005) however, we know that changes in terms of trade not only induce expenditure-switching or wealth effects, but also impact the number of varieties produced and traded in the economy, with strong effects on the overall degree of trade openness in the economy and on aggregate productivity (even for a given distribution of firm-specific productivity levels) through firms' entry and market share reallocations.…”

“…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 Bosca, Domenech & Ferri (2013). develop a general equilibrium model of a small open economy with search and matching frictions calibrated to Spain.…”

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

“…Their scope is therefore limited to the effects on the intensive margin of trade, i.e. expenditure switching and international wealth effects (see Bosca et al (2013), Lipinska & von Thadden (2012) or Langot & Lemoine (2014)). Since Ghironi & Melitz (2005) however, we know that changes in terms of trade not only induce expenditure-switching or wealth effects, but also impact the number of varieties produced and traded in the economy, with strong effects on the overall degree of trade openness in the economy and on aggregate productivity (even for a given distribution of firm-specific productivity levels) through firms' entry and market share reallocations.…”

“…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. Bosca, Domenech & Ferri (2013) develop a general equilibrium model of a small open economy with search and matching frictions calibrated to Spain. They show that a fiscal devaluation may be effective in stimulating output, hours worked and the trade balance.…”