Published online by Cambridge University Press: 19 July 2018
This paper examines the effects of fiscal devaluations in a model of a monetary union characterized by national fiscal policies and supranational monetary policy. We show that a revenue-neutral permanent tax shift in one country, which raises its consumption tax to finance a cut to labor taxes, increases welfare of the monetary union in the long run. The distribution of gains among countries depends on their degree of financial integration. We also document that price rigidities result in short-run welfare costs.
Comments on an early draft by Kosuke Aoki, Bianca De Paoli, Philipp Harms, Jan IntVeld, Christophe Kamps, Werner Roeger, Jean-Pierre Vidal, and seminar participants at the Royal Economic Society Meeting 2009 (University of Surrey), the European Economic Association Meeting 2009 (Barcelona), the European Central Bank, DG ECFIN (Brussels), the University of Aachen, and the Brussels Tax Forum 2012 are gratefully acknowledged.
The views expressed in this paper are those of the authors and do not necessarily reflect those of the Federal Reserve Board or the European Central Bank.