The Terms of Trade and the International Coordination of Fiscal Policy

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The Terms of Trade and the International Coordination of Fiscal Policy

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Devereux, Michael B

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Michael B. Devereux

Abstract

This paper develops an example of a noncooperative game between fiscal authorities in two countries. The key strategic link between countries is the terms of trade. An equilibrium without cooperation is characterized by excessive tax rates and public spending levels in each country. The outcome is analogous to the Nash equilibrium of the static optimal tariff game in trade theory. But in this model there is also a dynamic distortion caused by noncooperative behavior. This dynamic distortion depresses capital accumulation and reduces the equilibrium capital stock in each country. Numerical examples suggest a significant welfare benefit of cooperation. Copyright 1991 by Oxford University Press.

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Article provided by Oxford University Press in its journal Economic Inquiry.

Volume (Year): 29 (1991)
Issue (Month): 4 (October)
Pages: 720-36
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Handle: RePEc:oup:ecinqu:v:29:y:1991:i:4:p:720-36

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Andersen, Torben M & Spange, Morten, 2002. "International Interdependencies in Fiscal Stabilization Policies," CEPR Discussion Papers 3580, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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Andersen, Torben / Sörensen, Allan, 2007. "Product Market Integration and Income Taxation: Distortions and Gains from Trade," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
Torben Andersen, 2001. "European Integration -- A Downward Bias in Employment Policies?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
Holmlund, Bertil & Kolm, Ann-Sofie, 1999. "Economic Integration, Imperfect Competition, and International Policy Coordination," Working Paper Series 1999:7, Uppsala University, Department of Economics. [Downloadable!]
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- Holmlund, B. & Kolm, A.-S., 1999. "Economic Integration, Imperfect Competition, and International Policy Coordination," Papers 1999:7, Uppsala - Working Paper Series.
Marco Celentani & J. Ignacio Conde & Klaus Desmet, 2002. "Endogenous Policy Leads to Inefficient Risk Sharing," Economics Working Papers 593, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2003. [Downloadable!]
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- Marco Celentani & J. Ignacio Conde-Ruiz & Klaus Desmet, . "Endogenous Policy Leads to Inefficient Risk Sharing," Working Papers 2003-08, FEDEA. [Downloadable!]
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Paolo Epifani & Gino Gancia, 2008. "Openness, Government Size and the Terms of Trade," IEW - Working Papers iewwp359, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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- Paolo Epifani & Gino Gancia, 2009. "Openness, Government Size and the Terms of Trade," Review of Economic Studies, Blackwell Publishing, vol. 76(2), pages 629-668, 03. [Downloadable!] (restricted)

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