Tuesday 11 September 2012

Review literature on Fiscal Devaluations

Given the recent measures adopted by the government I post a small reading list on Fiscal Devaluations for the interested readers.

  1. Emmanuel Farhi Gita Gopinath Oleg Itskhoki: Fiscal Devaluations
  2. Ruud de Mooij, Michael KeenFiscal Devaluation and Fiscal Consolidation: The VAT in Troubled Times
  3. Francesco Franco: Improving competitiveness through a fiscal devaluation: the case of Portugal (first attempt/cross section)
  4. Francesco Franco: Adjusting to external imbalances within the EMU, the case of Portugal (second attempt/time series)


    1. Professor Franco,

      While still in the process of reading the literature on fiscal devaluation, I have understood that, among other conditions for it, are a stable private consumption and an increase in private savings. This is my reasoning:
      1- while the tax swap created an incentive towards saving, this may not be the case with the increase of the TSU for the labour factor. An increase in the VAT would lead to a substitution effect between current and future consumption, thereby encouraging saving. What this is, as I understand it, is a decrease in private income, which I have no reason to believe will lead to an increase in private savigs.
      2- Although this measure may increase employment, can it offset the disincetive to work it also causes? Workers will be paid less wages to work the same, which may reduce possible productivity increases (since the worker may reduce his effort, while still working the same nº of hours)
      I admit that my analysis is still very crude and that I require more time to be aware of all the implications and conditions of a FD, but, as I see it, the effects of these measures are largely unforsseeable given the theoretical framework and empirical testing.

      best regards

    2. John Keynes: No, workers need not be paid less after tax. The idea is that their social security contributions are funded out of VAT rather than payroll tax. Both VAT and payroll tax feed into prices. But because a VAT taxes consumption while a payroll tax taxes production, a VAT is more conducive to exports and capital formation (and the increase in capital formation can be had by all countries at once). For even greater effect, we can replace or offset not only payroll tax but also pay-as-you-go personal income tax; see "Maximalist 'fiscal devaluations' for Greece and Australia".

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