Trade Policies and Fiscal Devaluations
American Economic Journal: Macroeconomics
vol. 15,
no. 4, October 2023
(pp. 104-40)
Abstract
Fiscal devaluations—an increase in import tariffs and export subsidies (IX) or an increase in value-added taxes and payroll subsidies (VP)—have been shown to provide as much stimulus under fixed exchange rates as a currency devaluation. We find that if agents expect policies to be reversed and the tax pass-through is large, VP is contractionary and IX provides a modest boost. In our medium-scale DSGE model, both features are crucial in accounting for Germany's underperformance in response to VP in 2007. These findings cast doubt on fiscal devaluations as a cyclical stabilization tool when monetary policy is constrained.Citation
Erceg, Christopher, Andrea Prestipino, and Andrea Raffo. 2023. "Trade Policies and Fiscal Devaluations." American Economic Journal: Macroeconomics, 15 (4): 104-40. DOI: 10.1257/mac.20210163Additional Materials
JEL Classification
- E32 Business Fluctuations; Cycles
- E52 Monetary Policy
- E62 Fiscal Policy
- F13 Trade Policy; International Trade Organizations
- F33 International Monetary Arrangements and Institutions
- H20 Taxation, Subsidies, and Revenue: General
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