Fiscal Devaluations
The crisis in the Euro area has partly been blamed on the inability of individual countries to devalue their currencies. In this paper we evaluate the extent to which fiscal instruments can be used to replicate the behavior of an exchange rate devaluation in a New Keynesian Open Economy environment. We perform the analysis under alternate assumptions of producer and local currency pricing. We show that a combination of uniform import tariffs, export subsidies, consumption and labor taxes can generate allocations identical to those that follow an exchange rate devaluation. The specifics of which taxes are needed depend on the completeness of asset markets.
Year of publication: |
2011
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Authors: | Itskhoki, Oleg ; Gopinath, Gita ; Farhi, Emmanuel |
Institutions: | Society for Economic Dynamics - SED |
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