Fiscal devaluations: evidence using bilateral trade balance data
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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.
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