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The Welfare Economics of Cooperative and Noncooperative Fiscal Policy

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  • Willem H. Buiter
  • Kenneth M. Kletzer

Abstract

In a competitive two-country overlapping generations model with perfect capital mobility, a plan that is individually Pareto optimal (that is Pareto optimal with respect to individual preferences) can be sustained without coordination of national fiscal policies when the fiscal arsenal is restricted to lump-sum taxes and government borrowing. Cooperation is required to achieve a Pareto optimum with respect to the two utilitarian national social welfare functions. Cooperation and international side payments are required to achieve an optimum with respect to a utilitarian global social welfare function. Without international lump-sum transfers, when distortionary taxes on capital income are permitted, Pareto optima with respect to national social welfare functions and global social welfare optima will not be individual Pareto optima: efficiency is traded off for a more desirable intergenerational and international distribution of resources. With nationally provided international public goods, the achievement of individual Pareto efficiency requires coordination of public spending but not of financing.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3329.

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Date of creation: Apr 1990
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Publication status: published as Journal of Economic Dynamics and Control, Vol. 15, pp. 215-244, (1991).
Handle: RePEc:nbr:nberwo:3329

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Cited by:
  1. Buiter, Willem H & Sibert, Anne, 2004. "Cross-Border Tax Externalities: Are Budget Deficits too Small?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4164, C.E.P.R. Discussion Papers.
  2. Willem H. Buiter & Anne Sibert, 2011. "Government Budget Deficits in Large Open Economies," CESifo Working Paper Series 3476, CESifo Group Munich.
  3. Yasushi Iwamoto & Akihisa Shibata, 1999. "Foreign Tax Credit and the Current Account," International Tax and Public Finance, Springer, Springer, vol. 6(2), pages 131-148, May.
  4. Thomas Krichel & Paul Levine & Joseph Pearlman, 1994. "Fiscal and Monetary Policy in a Monetary Union: Credible Inflation Targets or Monetised Debt?," School of Economics Discussion Papers, School of Economics, University of Surrey 9403, School of Economics, University of Surrey.
  5. Jiming Ha & Anne Sibert,, 1996. "Strategic Capital Taxation in Large Open Economies with Mobile Capital," Archive Discussion Papers, Birkbeck, Department of Economics, Mathematics & Statistics 9608, Birkbeck, Department of Economics, Mathematics & Statistics.
  6. Steigum Jr, E., 1997. "Fiscal deficits, Asset Prices and Intergenerational Distribution in an Open Unionized Economy," Papers, Norwegian School of Economics and Business Administration- 7/97, Norwegian School of Economics and Business Administration-.
  7. Arjan Lejour & Harrie Verbon, 1996. "Capital mobility, wage bargaining, and social insurance policies in an economic union," International Tax and Public Finance, Springer, Springer, vol. 3(4), pages 495-513, October.
  8. Kollintzas, Tryphon & Philippopoulos, Apostolis & Vassilatos, Vanghelis, 1999. "Normative Aspects of Fiscal Policy in an Economic Union: a Review," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2212, C.E.P.R. Discussion Papers.
  9. Erling Steigum, 2001. "Trade Unions and the Burden of the Public Debt," CESifo Working Paper Series 587, CESifo Group Munich.
  10. Kletzer, Kenneth M., 1997. "Macroeconomic stabilization with a common currency: Does European Monetary Unification create a need for fiscal insurance of federalism?," ZEI Working Papers, ZEI - Center for European Integration Studies, University of Bonn B 04-1997, ZEI - Center for European Integration Studies, University of Bonn.
  11. Verbic, Miroslav & Majcen, Boris & Cok, Mitja, 2009. "Education and Economic Growth in Slovenia: A Dynamic General Equilibrium Approach with Endogenous Growth," MPRA Paper 17817, University Library of Munich, Germany.
  12. Østrup, Finn, 2005. "Fiscal Policy and Welfare under Different Exchange Rate Regimes," Working Papers, Copenhagen Business School, Department of Finance 2005-1, Copenhagen Business School, Department of Finance.

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