Coordination of fiscal policies in a world economy

Patrick J. Kehoe

Research output: Contribution to journalArticlepeer-review

46 Scopus citations

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 policymarkers are trivial and thus cooperative and non-cooperative government policies coincide. It is well known that this holds for tariff policies. However, this paper demonstrates the result does not apply to fiscal policy. In addition, the paper analyzes how optimally coordinated fiscal policies differ from non-cooperative policies. It finds that, relative to optimally coordinated levels, non-cooperative 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.

Original languageEnglish (US)
Pages (from-to)349-376
Number of pages28
JournalJournal of Monetary Economics
Volume19
Issue number3
DOIs
StatePublished - May 1987

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