Croatian Science Foundation research project IP-09-2014: Channels and effectiveness of fiscal devaluations (FIDE)

Grant holder: Institute for Public Finance, Zagreb
Duration: September 1, 2015 – August 31, 2018
Collaborators: Marina Tkalec, Maruška Vizek

Fiscal devaluation can be described as a budget-neutral mix of fiscal policies which should mimic the effects of nominal exchange rate devaluation, i.e. bring improvements in country’s external competitiveness and increase net exports. After the outset of the recent economic crisis, fiscal devaluations have become priority topic in economic policy discussions in Europe. These discussions are mostly related to European Monetary Union member states, but the topic is highly relevant for a broader set of countries, including those which may be outside currency unions, but pursue fixed exchange rate policy. The largest part of research on fiscal devaluations consists of simulation studies, whose results are driven by model specifications and calibrations. The econometric studies, on the other hand, which could provide answers on the effectiveness and channels of fiscal devaluations in practice, remain very scarce. Our research aims to fill some of the gaps in the literature, by providing new econometric evidence in an improved econometric approach to testing the hypothesis of the fiscal devaluation effectiveness, and by examining the relevance of some of the specific channels through which fiscal devaluations should work. The sample will include all EU countries for which data is available. We shall also consider the period of the recent crisis during which many EU countries implemented reforms of taxation systems.