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Coordination of fiscal policies in a world economy

  • Kehoe, Patrick J.

This paper provides a simple counterexample to the standard belief that in a world economy in which all countries are small, strategic interactions between policymakers are trivial and thus cooperative and noncooperative government policies coincide. It is well known that this holds for tariff policies. However, this paper demonstrates the result does not apply to government policies generally. Indeed, this paper presents a simple counterexample for the case of fiscal policy. In addition, the paper analyzes how optimally coordinated fiscal policies differ from noncooperative policies. It finds that, relative to optimally coordinated levels, noncooperative government spending can be too high or too low, depending on the sign of a transmission effect which captures the overall effect countries’ actions have on each other.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 19 (1987)
Issue (Month): 3 (May)
Pages: 349-376

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Handle: RePEc:eee:moneco:v:19:y:1987:i:3:p:349-376
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  1. Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, vol. 50(4), pages 863-94, July.
  2. Cooper, Richard N., 1985. "Economic interdependence and coordination of economic policies," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 23, pages 1195-1234 Elsevier.
  3. Hamada, Koichi, 1976. "A Strategic Analysis of Monetary Interdependence," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 677-700, August.
  4. Brock, William A. & Mirman, Leonard J., 1972. "Optimal economic growth and uncertainty: The discounted case," Journal of Economic Theory, Elsevier, vol. 4(3), pages 479-513, June.
  5. Rogoff, Kenneth, 1985. "Can international monetary policy cooperation be counterproductive?," Journal of International Economics, Elsevier, vol. 18(3-4), pages 199-217, May.
  6. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
  7. Calvo, Guillermo A., 1979. "Capital accumulation and welfare: a note," Economics Letters, Elsevier, vol. 4(2), pages 135-139.
  8. Guillermo A. Calvo & Maurice Obstfeld, 1985. "Optimal Time-Consistent Fiscal Policy with Uncertain Lifetimes," NBER Working Papers 1593, National Bureau of Economic Research, Inc.
  9. Fischer, Stanley, 1980. "Dynamic inconsistency, cooperation and the benevolent dissembling government," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 93-107, May.
  10. Michael J. Stutzer, 1984. "Time consistency of optimal plans: an elementary primer," Staff Report 91, Federal Reserve Bank of Minneapolis.
  11. David Levhari & Leonard J. Mirman, 1980. "The Great Fish War: An Example Using a Dynamic Cournot-Nash Solution," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 322-334, Spring.
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