International Fiscal Coordination under Imperfect Information

This study investigates the issue of optimal fiscal policies and international fiscal coordination across economies in the world of uncertainties and imperfect information. It lays out the strategic problems of coordination that we inevitably encounter when the integration of international capital markets is a reality and when we do not have enough information about other countries. In this international environment, the results show that there exists a precommitment mechanism with noncooperative dynamic equilibria, which would render us a higher level of welfare than the non-coordiation outcome. In these equilibria, the phases of low outcomes with high interest rates will appear intermittently between the phases of high outcomes with low interest rates. Under the proposed system, the results indicate that welfare will be reduced as uncertainty increases, whereas the gains from adopting this proposed mechanism will grow as the number of countries with open capital markets increases.