Fiscal Consolidation: An Exercise in the Methodology of Coordination

Guglielmo Maria Caporale and Michael Chui
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Michael Chui: European Central Bank

Journal of Economic Integration, 2005, vol. 20, 1-25

Abstract:

This paper outlines a new methodology for the study of international policy coordination, which builds on two separate approaches previously used in the literature: optimal simple rules, and game-theoretic analysis. The new approach is illustrated by using the example of a changed target for the debt-income ratio in the G-3. The results suggest that there are few policy externalities when only fiscal policy is coordinated, whilst coordination of both fiscal and monetary policy results in substantial externalities and welfare improvements. Our findings reflect the fact that, unlike earlier studies, we focus on the strategic interaction between (domestic) policy makers, as well as the standard exchange rate and interest rate transmission mechanisms.

Keywords: Optimal Control; Inflation Targets; Fiscal Consolidation; International Policy Coordination (search for similar items in EconPapers)
JEL-codes: C50 E10 F40 (search for similar items in EconPapers)
Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:ris:integr:0303

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