NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
loading...

Fiscal Devaluations

Emmanuel Farhi, Gita Gopinath, Oleg Itskhoki

NBER Working Paper No. 17662
Issued in December 2011, Revised in June 2013
NBER Program(s):Economic Fluctuations and Growth, International Finance and Macroeconomics, International Trade and Investment, Monetary Economics

We show that even when the exchange rate cannot be devalued, a small set of conventional fiscal instruments can robustly replicate the real allocations attained under a nominal exchange rate devaluation in a dynamic New Keynesian open economy environment. We perform the analysis under alternative pricing assumptions- producer or local currency pricing, along with nominal wage stickiness; under arbitrary degrees of asset market completeness and for general stochastic sequences of devaluations. There are two types of fiscal policies equivalent to an exchange rate devaluation-one, a uniform increase in import tariff and export subsidy, and two, a value-added tax increase and a uniform payroll tax reduction. When the devaluations are anticipated, these policies need to be supplemented with a consumption tax reduction and an income tax increase. These policies are revenue neutral. In certain cases equivalence requires, in addition, a partial default on foreign bond holders. We discuss the issues of implementation of these policies, in particular, under the circumstances of a currency union.

download in pdf format
   (825 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w17662

Fiscal Devaluations” (with Gita Gopinath and Oleg Itskhoki) Review of Economic Studies, forthcoming. citation courtesy of

Users who downloaded this paper also downloaded* these:
de Mooij and Keen w17913 'Fiscal Devaluation' and Fiscal Consolidation: The VAT in Troubled Times
Engen and Skinner w5826 Taxation and Economic Growth
Attanasio, Hurst, and Pistaferri w17982 The Evolution of Income, Consumption, and Leisure Inequality in The US, 1980-2010
Werning and Farhi w18280 Fiscal Unions
de Mooij and Keen "Fiscal Devaluation" and Fiscal Consolidation: The VAT in Troubled Times
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us