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The Distributional Implications of Fiscal Devaluations

Giagheddu, Marta LU (2020)
Abstract
This paper explores the distributional implications of a fiscal devaluation acquired through a shift from labor to consumption taxes in an open-economy Heterogeneous Agents New Keynesian model with incomplete markets and uninsurable income risk. A permanent fiscal devaluation perfectly mimicking a nominal devaluation in aggregate implies an increase in transfers balanced by lower profits. This leaves the representative agent unaffected. However, as the higher transfers affect all agents symmetrically, while decreased profits impact agents according to their wealth, distributional effects arise. The implicit insurance provided by higher transfers benefits wealth-poor agents and mitigates the equity concerns associated with fiscal... (More)
This paper explores the distributional implications of a fiscal devaluation acquired through a shift from labor to consumption taxes in an open-economy Heterogeneous Agents New Keynesian model with incomplete markets and uninsurable income risk. A permanent fiscal devaluation perfectly mimicking a nominal devaluation in aggregate implies an increase in transfers balanced by lower profits. This leaves the representative agent unaffected. However, as the higher transfers affect all agents symmetrically, while decreased profits impact agents according to their wealth, distributional effects arise. The implicit insurance provided by higher transfers benefits wealth-poor agents and mitigates the equity concerns associated with fiscal devaluations. (Less)
Please use this url to cite or link to this publication:
author
publishing date
type
Working paper/Preprint
publication status
published
subject
keywords
Fiscal devaluation, Redistributive effect of taxes, Heterogeneous agents, Wealth distribution, E21, E60, E62, F41, H23
publisher
SSRN
DOI
10.2139/ssrn.3651258
language
English
LU publication?
no
id
0aed4d64-b0a2-4125-984e-5124d84221ef
date added to LUP
2022-03-25 14:59:44
date last changed
2022-03-28 12:59:00
@misc{0aed4d64-b0a2-4125-984e-5124d84221ef,
  abstract     = {{This paper explores the distributional implications of a fiscal devaluation acquired through a shift from labor to consumption taxes in an open-economy Heterogeneous Agents New Keynesian model with incomplete markets and uninsurable income risk. A permanent fiscal devaluation perfectly mimicking a nominal devaluation in aggregate implies an increase in transfers balanced by lower profits. This leaves the representative agent unaffected. However, as the higher transfers affect all agents symmetrically, while decreased profits impact agents according to their wealth, distributional effects arise. The implicit insurance provided by higher transfers benefits wealth-poor agents and mitigates the equity concerns associated with fiscal devaluations.}},
  author       = {{Giagheddu, Marta}},
  keywords     = {{Fiscal devaluation; Redistributive effect of taxes; Heterogeneous agents; Wealth distribution; E21; E60; E62; F41; H23}},
  language     = {{eng}},
  note         = {{Working Paper}},
  publisher    = {{SSRN}},
  title        = {{The Distributional Implications of Fiscal Devaluations}},
  url          = {{http://dx.doi.org/10.2139/ssrn.3651258}},
  doi          = {{10.2139/ssrn.3651258}},
  year         = {{2020}},
}