Fiscal devaluations: evidence using bilateral trade balance data
- 600 Downloads
We study the effects of fiscal devaluations on the trade balances of European Union countries over the 2000–2014 period using bilateral trade balance data. This enables us to control for the coincidence of tax policy measures in different countries, which is an aspect left unconsidered in previous econometric studies. A fiscal devaluation consisting of a budget-neutral tax shift in the amount of 1% of gross domestic product (GDP) from employers’ social security contributions to value added tax leads to a short-term improvement of bilateral trade balance ranging between 0.3 and 0.6% of GDP. An extrapolation of our baseline estimate to the overall trade balance yields an impact of 4.3% of GDP for the whole sample, which is slightly higher than presented in previous empirical research. Applying extrapolation to the trade deficit countries in the euro area shows that these countries’ balance of trade with the rest of the euro area improves by only 0.75% of GDP. Thus, the magnitude of the fiscal devaluation impact on the trade balance varies significantly across countries, depending on their trade openness, among other potentially relevant factors.
KeywordsFiscal devaluation Tax structure International trade Trade balance European Union
JEL ClassificationF14 F42 F45 H20 H87
We are very grateful to the two anonymous reviewers for their valuable comments and suggestions. We would also like to thank the participants of the FIW Research Conference “International Economics” in Vienna, December 2016, the Public Sector Economics conference in Zagreb, October 2016, and the UECE Conference on Economic and Financial Adjustments in Lisbon, June 2017, for their comments on earlier versions of the study. All remaining errors are ours. This study is supported by the Croatian Science Foundation as Project No. 7017.
- Banco de Portugal (2011). The impact of a tax change aimed at increasing the external competitiveness of the Portuguese economy. Economic Bulletin, 17, 39–42.Google Scholar
- Berger H., & Nitsch, V. (2010). The Euro’s effect on trade imbalances (IMF Working Paper, No. 10/226).Google Scholar
- Bernoth, K., Burauel, P., & Engler, P. (2014). Fiskalische Abwertung: Wirtschaftlicher Impuls für die Krisenländer im Euroraum (DIW Wochenbericht Nr. 39).Google Scholar
- Bouthevillain, C., Cour-Thimann, P., Van Den Dool, G., Hernández De Cos, P., Langenus, G., Mohr, M, Momigliano, M., & Tujula, M. (2001). Cyclically adjusted budget balances: An alternative approach (European Central Bank Working Paper Series, no. 77). Frankfurt: European Central Bank.Google Scholar
- D’Acunto, F., Hoang, D., & Weber, M. (2016). The effect of unconventional fiscal policy on consumption expenditure (NBER Working Paper 22563).Google Scholar
- De Mooij, R., & Keen, M. (2013). “Fiscal Devaluation” and Fiscal Consolidation: The VAT in Troubled Times. In A. Alesina & F. Giavazzi (Eds.), Fiscal policy after the financial crisis (pp. 443–485). Chicago: National Bureau of Economic Research, The University of Chicago Press.CrossRefGoogle Scholar
- EC (2008). EMU@10: Successes and Challenges After ten years of Economic and Monetary Union. European Economy, No. 2.Google Scholar
- EC (2013). Study on the impacts of fiscal devaluation (Taxation Papers, Working Paper No. 36–2013).Google Scholar
- ECB (2012). Competitiveness and external imbalances within the euro area. (A team of the Working Group on Econometric Modelling of the European System of Central Banks) (Occasional Paper Series 139). European Central Bank.Google Scholar
- IMF (2011). Fiscal Monitor: Addressing Fiscal Challenges to Reduce Economic Risks, Appendix 1. “Fiscal Devaluation”: What Is It—and Does It Work? World economic and financial surveys. International Monetary Fund.Google Scholar
- IMF (2012). Internal devaluation—The IMF view. Available at: https://kkalev4economy.wordpress.com/2012/03/20/internal-devaluation-the-imf-view/. Accessed 23 Jan 2017.
- IMF (2015). Crisis program review. Available at: http://www.imf.org/external/pubs/ft/survey/so/2015/pol121615a.htm. Accessed 23 Jan 2017.
- Koske, I. (2013). Fiscal devaluation—Can it help to boost competitiveness? (OECD Department Working Papers, No. 1089). OECD Publishing.Google Scholar
- Lipińska, A., & Von Thadden, L. (2009). Monetary and fiscal aspects of indirect tax changes in a monetary union (European Central Bank Working Paper No. 1097).Google Scholar
- Lipińska, A., & Von Thadden, L. (2012). On the (In)effectiveness of Fiscal Devaluations in a Monetary Union. Finance and Economics Discussion Series 2012–71. Washington, DC: Federal Reserve Board.Google Scholar
- Poterba, J. M. (2013). Comment on “fiscal devaluation” and fiscal consolidation: The VAT in troubled times. In A. Alesina & F. Giavazzi (Eds.), Fiscal policy after the financial crisis (pp. 486–493). Chicago: National Bureau of Economic Research, The University of Chicago Press.Google Scholar