@article {16266,
	title = {Fiscal Devaluations},
	journal = {Review of Economic Studies},
	volume = {81},
	number = {2},
	year = {2014},
	pages = {725-760},
	abstract = {We show that even when the exchange rate cannot be devalued, a\&nbsp;small\&nbsp;set of\&nbsp;conventional\&nbsp;fiscal instruments can robustly replicate the real allocations attained under a nominal exchange rate devaluation in a dynamic New Keynesian open economy environment. We perform the analysis under alternative pricing assumptions{\textemdash}producer or local currency pricing, along with nominal wage stickiness; under arbitrary degrees of asset market completeness and for general stochastic sequences of devaluations. There are two types of fiscal policies equivalent to an exchange rate devaluation{\textemdash}one, a uniform increase in import tariff and export subsidy, and two, a value-added tax increase and a uniform payroll tax reduction. When the devaluations are anticipated, these policies need to be supplemented with a consumption tax reduction and an income tax increase. These policies are revenue neutral. In certain cases equivalence requires, in addition, a partial default on foreign bond holders. We discuss the issues of implementation of these policies, in particular, under the circumstances of a currency union.\&nbsp;},
	url = {http://dx.doi.org/10.1093/restud/rdt036},
	author = {Emmanuel Farhi and Gita Gopinath and Oleg Itskhoki}
}
