Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/62388 
Year of Publication: 
2012
Series/Report no.: 
IZA Discussion Papers No. 6624
Publisher: 
Institute for the Study of Labor (IZA), Bonn
Abstract: 
We study fiscal devaluation in a small-open economy with labor market search frictions. Our analysis shows the key role of both dimensions in shaping the optimal tax scheme. By reducing labor market distortions, the tax reform is welfare-improving. Yet, as it makes imports more expensive, fiscal devaluation lowers the agents' purchasing power, which is welfare-reducing. These contrasting effects give rise to an optimal tax scheme. Besides, transition matters. If the economy is better off in the long run, the required transitional saving effort increases the cost of the reform, thereby calling for a moderate magnitude of fiscal devaluation.
Subjects: 
fiscal devaluation
consumption tax
payroll tax
labor market search
small open economy
Dynamic General Equilibrium model
JEL: 
E27
E62
H21
J38
Document Type: 
Working Paper

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