Efficiency and coordination of fiscal policy in open economies

Gilbert Koenig and Irem Zeyneloglu ()

Working Papers of BETA from Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg

Abstract: In this paper, we use a two country stochastic “new open economy macroeconomics” model with sticky wages and imperfect competition where public spending and private consumption appear in a non-separable way in individual preferences. We use this setup to define optimal fiscal policy in the face of a productivity shock and to analyze the efficiency of this optimal fiscal policy as a stabilization tool. We also consider strategic games between fiscal authorities in the two countries in order to see if there are additional gains from fiscal cooperation. We find that optimal fiscal policy consists of a deviation in the same direction as the deviation of the shock and that this type of reaction reduces the negative effects of the shock. We find also that fiscal cooperation generates a higher level of welfare than under Nash. However, the gain from cooperation is very likely to be negligible.

Keywords: Fiscal policy; policy coordination; stabilization; new open economy macroeconomics. (search for similar items in EconPapers)
JEL-codes: E62 F41 F42 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-cba, nep-mac and nep-pbe
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:ulp:sbbeta:2006-09

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