Coordination of fiscal policies in a world economy

Patrick Kehoe

No 98, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: This paper provides a simple counterexample to the standard belief that in a world economy in which all countries are small, strategic interactions between policymakers are trivial and thus cooperative and noncooperative government policies coincide. It is well known that this holds for tariff policies. However, this paper demonstrates the result does not apply to government policies generally. Indeed, this paper presents a simple counterexample for the case of fiscal policy. In addition, the paper analyzes how optimally coordinated fiscal policies differ from noncooperative policies. It finds that, relative to optimally coordinated levels, noncooperative government spending can be too high or too low, depending on the sign of a transmission effect which captures the overall effect countries? actions have on each other.

Keywords: International economic relations; Fiscal policy (search for similar items in EconPapers)
Date: 1986
New Economics Papers: this item is included in nep-pub
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Published in Journal of Monetary Economics (Vol.19, n.3, May 1987, pp.349-376)

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Journal Article: Coordination of fiscal policies in a world economy (1987)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:98

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