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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

equations for ‘Southern European countries’, if the equations are symmetric across regions. Ricardian households inSouthern European countries’ maximize their intertemporal utility function U t R H = 𝔼 t ⁢     ∑ k = 0 ∞ β k ⁢     { log ⁡ C t + k R H − N t + k R H 1 + ∅ 1 + ∅   } , ( 1 ) where 𝔼 t is the