Gita Gopinath
Harvard University
Abstract:
We show that even when the exchange rate cannot be devalued, a small set of conventional fiscal instruments can robustly replicate the real allocations attained under a nominal exchange rate devaluation in a standard New Keynesian open economy environment. We perform the analysis under alternative pricing assumptions -- producer or local currency pricing, along with nominal wage stickiness; under alternative asset market structures, and for anticipated and unanticipated devaluations. There are two types of fiscal policies equivalent to an exchange rate devaluation -- one, a uniform increase in import tariff and export subsidy, and two, an increase in value-added tax and a uniform reduction in payroll tax. When the devaluations are anticipated, these policies need to be supplemented with a reduction in consumption tax and an increase in income taxes. These policies have zero impact on fiscal revenues. In certain cases equivalence requires in addition a partial default on foreign bond holders. We discuss the issues of implementation of these policies, in particular, under the circumstances of a currency union.
Date: December 19, 2011
Time: 03:00 P.M.
Venue:
AMEX Conference Room (Second Floor)
Department of Economics,
Delhi School of Economics,
New Delhi-110007(INDIA)
Location:
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