Is Coordination of Fiscal Deficits Necessary?
AbstractNational budget deficits can create externalities through their effects on international interest rates. This paper examines the scope for fiscal rules restricting government borrowing for the case where government revenues (on the margin) stem from capital income taxation. There is no need to coordinate national borrowing, if governments have access to both a saving and an investment tax instrument. In the absence of a saving tax, however, national fiscal policies affect welfare abroad through the international interest rate. A reduction in first period deficits tied to increased government spending later is always welfare improving. Reducing first period deficits without further coordination of subsequent tax and spending policies will generally not improve welfare.
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Bibliographic InfoPaper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 98-05.
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Other versions of this item:
- Huizinga, H.P. & Nielsen, S.B., 1998. "Is Coordination of Fiscal Deficits Necessary?," Discussion Paper 1998-61, Tilburg University, Center for Economic Research.
- Huizinga, Harry & Nielsen, Soren Bo, 1998. "Is Coordination of Fiscal Deficits Necessary?," CEPR Discussion Papers 1936, C.E.P.R. Discussion Papers.
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
- H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
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