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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

of a fiscal devaluation inSouthern European countries’ is to correct their loss of competitiveness relative to ‘Central-Northern European countries’ and the current account imbalance within the euro area. Our approach highlights international transmission channels and allows us to analyze not only the effects of the fiscal devaluations inSouthern European countries’ on their own economies, but also the impact on economic variables in ‘Central-Northern European countries’. Although several existing papers have looked at fiscal devaluations, most of them use