Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/154158
Authors: 
Gomes, Sandra
Jacquinot, Pascal
Pisani, Massimiliano
Year of Publication: 
2014
Series/Report no.: 
ECB Working Paper 1725
Abstract: 
We assess the effects on trade balance of a temporary fiscal devaluation enacted by Spain or Portugal by simulating EAGLE, a large-scale multi-country dynamic general equilibrium model of the euro area. Social contributions paid by firms are reduced by 1 percent of GDP for four years and are financed by increasing consumption tax. Our main results are the following. First, the Spanish trade balance improves by 0.5 percent of GDP, the (before-consumption tax) real exchange rate depreciates by 0.7 percent and the terms of trade deteriorate by 1 percent. Second, similar results are obtained in the case of Portugal. Third, the trade balance improves when the fiscal devaluation is enacted also in the rest of the euro area, albeit to a lower extent than in the case of unilateral (country-specific) implementation. Fourth, quantitative results crucially depend on the degree of substitutability between domestic and imported tradables.
Subjects: 
dynamic general equilibrium modeling
fiscal devaluation
trade deficit
JEL: 
F32
F47
H20
ISBN: 
978-92-899-1133-7
Document Type: 
Working Paper

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