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International interdependencies in fiscal stabilization policies

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  • Andersen, Torben M.
  • Spange, Morten

Abstract

Trade links imply that business cycle fluctuations are transmitted to trade partners. To the extent that fiscal policy can mitigate business cycle fluctuations this implies that there are international interdependencies in stabilization policies. We analyse the role of fiscal policy in mitigating risk or providing implicit insurance in the presence of capital market imperfections, and how this is affected by adjustment failures (rigid wages). It is shown that there is a welfare case for an active stabilization policy and that it is larger in the presence of adjustment failures (rigid wages). The international interdependency may in the absence of adjustment failures imply that non-cooperative stabilization policies entail excessive stabilization, whereas there is always insufficient stabilization in the presence of adjustment failures.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 50 (2006)
Issue (Month): 5 (July)
Pages: 1169-1195

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Handle: RePEc:eee:eecrev:v:50:y:2006:i:5:p:1169-1195

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References

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Citations

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Cited by:
  1. Michael P. Evers, 2007. "Optimum Policy Domains in an Interdependent World," Bonn Econ Discussion Papers bgse12_2007, University of Bonn, Germany.
  2. Torben Andersen, 2005. "Is there a Role for an Active Fiscal Stabilization Policy?," CESifo Working Paper Series 1447, CESifo Group Munich.
  3. Andersen, Torben M, 2002. "Fiscal Stabilization Policy in a Monetary Union with Inflation Targeting," CEPR Discussion Papers 3232, C.E.P.R. Discussion Papers.
  4. Andersen, Torben M., 2005. "Fiscal stabilization policy in a monetary union with inflation targeting," Journal of Macroeconomics, Elsevier, vol. 27(1), pages 1-29, March.
  5. Spange, Morten, 2008. "International spill-over effects of labour market rigidities," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 157-178, March.
  6. Andersen, Torben M., . "The Macroeconomic Policy Mix in a Monetary Union with Flexible Inflation Targeting," Economics Working Papers 2003-2, School of Economics and Management, University of Aarhus.
  7. Gilbert Koenig & Irem Zeyneloglu, 2012. "International consumption risk sharing and fiscal policy," Economics Bulletin, AccessEcon, vol. 32(2), pages 1250-1260.
  8. Andersen, Torben M., 2008. "The macroeconomic policy mix in a monetary union with flexible inflation targeting," Journal of International Money and Finance, Elsevier, vol. 27(3), pages 411-437, April.

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