TY - JOUR
AU1 - Farhi, Emmanuel
AU2 - Gopinath, Gita
AU3 - Itskhoki, Oleg
AB - We show that even when the exchange rate cannot be devalued, a small set of conventional fiscal instruments can robustly replicate the real allocations attained under a nominal exchange rate devaluation in a dynamic New Keynesian open economy environment. We perform the analysis under alternative pricing assumptions—producer or local currency pricing, along with nominal wage stickiness; under arbitrary degrees of asset market completeness and for general stochastic sequences of devaluations. There are two types of fiscal policies equivalent to an exchange rate devaluation—one, a uniform increase in import tariff and export subsidy, and two, a value-added tax increase and a uniform payroll tax reduction. When the devaluations are anticipated, these policies need to be supplemented with a consumption tax reduction and an income tax increase. These policies are revenue neutral. In certain cases equivalence requires, in addition, a partial default on foreign bond holders. We discuss the issues of implementation of these policies, in particular, under the circumstances of a currency union.
TI - Fiscal Devaluations
JF - The Review of Economic Studies
DO - 10.1093/restud/rdt036
DA - 2014-04-01
UR - https://www.deepdyve.com/lp/oxford-university-press/fiscal-devaluations-5W53IOHzxM
SP - 725
EP - 760
VL - 81
IS - 2
DP - DeepDyve
ER -