IMF Economic Review

, Volume 65, Issue 2, pp 241–272 | Cite as

Fiscal Devaluation in a Monetary Union

  • Philipp Engler
  • Giovanni Ganelli
  • Juha TervalaEmail author
  • Simon Voigts


Given that exchange rate devaluations are no longer available in a monetary union, fiscal devaluations are one potential way to address divergence in competitiveness and trade imbalances. Employing a DSGE model calibrated to the euro area, we quantify the international effects of a fiscal devaluation implemented as a revenue-neutral shift from employers’ social contributions to the value added tax. We find that a fiscal devaluation carried out in the South has a strong positive effect on output, which is five times larger than under a wage tax cut. However, the effect on the trade balance and the real exchange rate is mild. The negative effect on the North’s output is weak.


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Supplementary material

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Supplementary material 1 (XLSX 16 kb)
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Supplementary material 3 (ZIP 12 kb) (11 kb)
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Copyright information

© International Monetary Fund 2017

Authors and Affiliations

  • Philipp Engler
    • 1
  • Giovanni Ganelli
    • 2
  • Juha Tervala
    • 3
    Email author
  • Simon Voigts
    • 4
  1. 1.School of Business and EconomicsFreie Universität BerlinBerlinGermany
  2. 2.IMF Regional Office for Asia and the PacificTokyoJapan
  3. 3.Department of Political and Economic StudiesUniversity of HelsinkiHelsinkiFinland
  4. 4.School of Business and EconomicsHumboldt-Universität zu BerlinBerlinGermany

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