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Government Budget Deficits in Large Open Economies

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  • Willem H. Buiter
  • Anne Sibert

Abstract

Large and growing levels of public debt in the United States, United Kingdom, Japan and the Euro Area raise new interest in the cross-country effects of a large open economy’s deficits. We consider a dynamic optimising model with costly tax collection and exogenously given public spending and initial debt. We ask whether the externalities associated with an individual country’s deficits are positive or negative. We characterise the path of taxes in the Nash equilibrium where policy makers act nationalistically and compare this outcome to the global optimal outcome.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3476.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3476

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Keywords: fiscal policy; international policy coordination; optimal taxation;

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  1. Louis Kaplow, 1989. "Optimal Taxation with Costly Enforcement and Evasion," NBER Working Papers 2996, National Bureau of Economic Research, Inc.
  2. Sinn, Hans-Werner, 1990. "Tax harmonization and tax competition in Europe," Munich Reprints in Economics 19846, University of Munich, Department of Economics.
  3. Christophe Chamley, 1980. "The Welfare Cost of Capital Income Taxation in a Growing Economy," Cowles Foundation Discussion Papers 553, Cowles Foundation for Research in Economics, Yale University.
  4. Rogoff, Kenneth & Sibert, Anne, 1988. "Elections and Macroeconomic Policy Cycles," Review of Economic Studies, Wiley Blackwell, vol. 55(1), pages 1-16, January.
  5. Buiter, Willem H. & Kletzer, Kenneth M., 1991. "The welfare economics of cooperative and noncooperative fiscal policy," Journal of Economic Dynamics and Control, Elsevier, vol. 15(1), pages 215-244.
  6. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
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