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Philipp Engler, Mr. Giovanni Ganelli, Juha Tervala, and Simon Voigts
Using a DSGE model calibrated to the euro area, we analyze the international effects of a fiscal devaluation (FD) implemented as a revenue-neutral shift from employer's social contributions to the Value Added Tax. We find that a FD in ‘Southern European countries’ has a strong positive effect on output, but mild effects on the trade balance and the real exchange rate. Since the benefits of a FD are small relative to the divergence in competitiveness, it is best addressed through structural reforms.
Philipp Engler, Mr. Giovanni Ganelli, Juha Tervala, and Simon Voigts

) where C t S E and C t C N E respectively denote the consumption by households in ‘Southern European countriesof theSouthern European countries’’ and the ‘Central-Northern European countries’’ goods, σ is the elasticity of substitution between the ‘Southern European countries’ and the ‘Central-Northern European countries’ goods (cross-country substitutability, for short) and ω is the steady state share of imported goods in the consumption basket of the ‘Southern European countries’. The consumption of the ‘Southern European countries’’ and the ‘Central