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Domestic Politics and the International Coordination of Fiscal Policies

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  • Guido Tabellini

    (UCLA)

Abstract

This paper investigates the desirability of international fiscal policy coordination in the presence of a domestic political distortion. The domestic distortion results from the inability of the current policy-maker to enter into a binding agreement with future policy-makers about the composition of public spending. This distortion generates a bias towards budget deficits. International coordination can exacerbate this bias, and thus reduce social welfare at home and abroad. The reason is that international coordination enables the domestic and foreign governments to form a coalition that excludes future policy-makers. This international coalition reduces the cost of running a budget deficit, and thus enhances the adverse effects of the domestic political distortion.

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Bibliographic Info

Paper provided by UCLA Department of Economics in its series UCLA Economics Working Papers with number 529.

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Date of creation: 01 Oct 1988
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Handle: RePEc:cla:uclawp:529

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Web page: http://www.econ.ucla.edu/

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  1. Buiter,Willem H. & Marston,Richard C., 1986. "International Economic Policy Coordination," Cambridge Books, Cambridge University Press, number 9780521337809.
  2. van der Ploeg, Frederick, 1987. "International Policy Coordination in Interdependent Monetary Economies," CEPR Discussion Papers 169, C.E.P.R. Discussion Papers.
  3. Bengt Holmstrom & Roger B. Myerson, 1981. "Efficient and Durable Decision Rules with Incomplete Information," Discussion Papers 495, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Dornbusch, Rudiger, 1983. "Real Interest Rates, Home Goods, and Optimal External Borrowing," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 141-53, February.
  5. Giavazzi, Francesco & Pagano, Marco, 1988. "The advantage of tying one's hands : EMS discipline and Central Bank credibility," European Economic Review, Elsevier, vol. 32(5), pages 1055-1075, June.
  6. J. David Richardson, 1987. "International Coordination of Trade Policy," NBER Working Papers 2293, National Bureau of Economic Research, Inc.
  7. Svensson, Lars E O & Razin, Assaf, 1983. "The Terms of Trade and the Current Account: The Harberger-Laursen-Metzler Effect," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 97-125, February.
  8. Patrick J. Kehoe, 1986. "International policy cooperation may be undesirable," Staff Report 103, Federal Reserve Bank of Minneapolis.
  9. Cukierman, Alex & Meltzer, Allan H, 1986. "A Positive Theory of Discretionary Policy, the Cost of Democratic Government and the Benefits of a Constitution," Economic Inquiry, Western Economic Association International, vol. 24(3), pages 367-88, July.
  10. Kenneth Rogoff, 1990. "Equilibrium Political Budget Cycles," NBER Working Papers 2428, National Bureau of Economic Research, Inc.
  11. Devereux, Michael, 1987. "Fiscal spending, the terms of trade, and real interest rates," Journal of International Economics, Elsevier, vol. 22(3-4), pages 219-235, May.
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Cited by:
  1. Willem Buiter & Anne Sibert, 2004. "Cross-Border Tax Externalities: Are Budget Deficits Too Small?," Birkbeck Working Papers in Economics and Finance 0408, Birkbeck, Department of Economics, Mathematics & Statistics.
  2. Banerjee, Gaurango, 2001. "Rules and discretion with common central bank and separate fiscal authorities," Journal of Economics and Business, Elsevier, vol. 53(1), pages 45-68.
  3. Van Der Ploeg, F., 1989. "Tow Essays On Political Economy," Papers 8909, Tilburg - Center for Economic Research.
  4. Carmen Díaz-Roldán, . "Coordination of Fiscal Policies in a Monetary Union," Working Papers on International Economics and Finance 00-09, FEDEA.
  5. Laurence H. Meyer & Brian M. Doyle & Joseph E. Gagnon & Dale W. Henderson, 2002. "International coordination of macroeconomic policies: still alive in the new millennium?," International Finance Discussion Papers 723, Board of Governors of the Federal Reserve System (U.S.).
  6. Joseph Daniels & David VanHoose, 1998. "Two-Country Models of Monetary and Fiscal Policy: What Have We Learned? What More Can We Learn?," Open Economies Review, Springer, vol. 9(3), pages 265-284, July.
  7. John William Hatfield & Gerard Padró i Miquel, 2008. "A Political Economy Theory of Partial Decentralization," NBER Working Papers 14628, National Bureau of Economic Research, Inc.
  8. Jay Bryson & Henrik Jensen & David Hoose, 1993. "Rules, discretion, and international monetary and fiscal policy coordination," Open Economies Review, Springer, vol. 4(2), pages 117-132, June.
  9. Jon Faust, 1992. "Whom can we trust to run the Fed? Theoretical support for the founders' views," International Finance Discussion Papers 429, Board of Governors of the Federal Reserve System (U.S.).
  10. Jaewoo Lee & Michelle R. Garfinkel, 2000. "Political Influence and the Dynamic Consistency of Policy," American Economic Review, American Economic Association, vol. 90(3), pages 649-666, June.
  11. Rui Henrique Alves & Óscar Afonso, 2006. "The “New” Stability and Growth Pact: More Flexible, Less Stupid?," FEP Working Papers 218, Universidade do Porto, Faculdade de Economia do Porto.

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