Trade policies and fiscal devaluations Christopher Erceg, Andrea Prestipino and Andrea Raffo
By: Erceg, Christopher J
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Contributor(s): Prestipino, Andrea | Raffo, Andrea.
Material type: 
ArticleSubject(s): COMERCIO | IMPUESTOS | REDUCCIONES TRIBUTARIAS | POLITICA FISCAL | ACUERDOS COMERCIALES | MODELOS ECONOMETRICOS
In:
American Economic Journal : Macroeconomics v. 15, n. 4, October 2023, p. 104-140Summary: 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.
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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.
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