Stabilisation and rebalancing with fiscal or monetary devaluation: a model-based comparison

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Series Details Number 22
Publication Date 22/12/2015
ISBN 978-92-79-48700-2
ISSN 2443-8022
EC KC-BD-15-022-EN-N
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Summary:

The paper uses a small open economy general-equilibrium model to compare fiscal and nominal exchange rate devaluation with respect to their impact on economic activity and the current account.

In particular, it investigates the extent to which fiscal devaluation mimics nominal exchange rate adjustment and mitigates the output loss associated with demand rebalancing and external adjustment. The results suggest that internal or external devaluation can support external adjustment and mitigate its impact on economic activity, without leading to lasting adjustment themselves. However, the quantitative contribution of a tax shift from labour to consumption, the standard example of fiscal devaluation, remains moderate.

Source Link https://ec.europa.eu/info/publications/economy-finance/stabilisation-and-rebalancing-fiscal-or-monetary-devaluation-model-based-comparison_en
Alternative sources
  • https://ec.europa.eu/info/sites/info/files/dp022_en.pdf
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