Trade policies and fiscal devaluations

RePEc Short ID: pra187
ORCID iD: 0000-0003-1799-1739

Erceg, Christopher J.; Prestipino, Andrea; Raffo, Andrea

doi:10.17016/IFDP.2022.1347

Working Paper

Trade policies and fiscal devaluations

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.

Keywords: Trade Policy; Fiscal Policy; Exchange Rates; Fiscal Devaluation;

JEL Classification: E32; F30; H22;

https://doi.org/10.17016/IFDP.2022.1347