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The Terms of Trade and the International Coordination of Fiscal Policy

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  • Devereux, Michael B

Abstract

This paper develops an example of a noncooperative game between fiscal authorities in two countries. The key strategic link between countries is the terms of trade. An equilibrium without cooperation is characterized by excessive tax rates and public spending levels in each country. The outcome is analogous to the Nash equilibrium of the static optimal tariff game in trade theory. But in this model there is also a dynamic distortion caused by noncooperative behavior. This dynamic distortion depresses capital accumulation and reduces the equilibrium capital stock in each country. Numerical examples suggest a significant welfare benefit of cooperation. Copyright 1991 by Oxford University Press.

Suggested Citation

  • Devereux, Michael B, 1991. "The Terms of Trade and the International Coordination of Fiscal Policy," Economic Inquiry, Western Economic Association International, vol. 29(4), pages 720-736, October.
  • Handle: RePEc:oup:ecinqu:v:29:y:1991:i:4:p:720-36
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    References listed on IDEAS

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    Cited by:

    1. Andersen, Torben M., 2006. "The public sector and international integration," Economics Letters, Elsevier, vol. 93(2), pages 202-209, November.
    2. Torben M. Andersen & Allan Sørensen, 2013. "Product market integration, tax distortions and public sector size," Economics Working Papers 2013-28, Department of Economics and Business Economics, Aarhus University.
    3. Hassan Molana & Catia Montagna & Chang Yee Kwan, 2012. "Subsidies As Optimal Fiscal Stimuli," Bulletin of Economic Research, Wiley Blackwell, vol. 64(Supplemen), pages 149-167, December.
    4. Paolo Epifani & Gino Gancia, 2005. "On Globalization and the Growth of Governments," Working Papers 267, Barcelona Graduate School of Economics.
    5. Torben Andersen, 2001. "European Integration - A Downward Bias in Employment Policies?," CESifo Working Paper Series 574, CESifo Group Munich.
    6. Müller, Gernot Johannes & Hettig, Thomas & Mueller, Gernot, 2015. "Fiscal policy coordination in currency unions (at the zero lower bound)," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112826, Verein für Socialpolitik / German Economic Association.
    7. Marco Celentani & J. Ignacio Conde-Ruiz & Klaus Desmet, 2004. "Endogenous Policy Leads to Inefficient Risk Sharing," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 758-787, July.
    8. Andersen, Torben M., 2002. "International Integration, Risk and the Welfare State," IZA Discussion Papers 456, Institute for the Study of Labor (IZA).
    9. Paolo Epifani & Gino Gancia, 2009. "Openness, Government Size and the Terms of Trade," Review of Economic Studies, Oxford University Press, vol. 76(2), pages 629-668.
    10. Beetsma, Roel M.W.J. & Jensen, Henrik, 2005. "Monetary and fiscal policy interactions in a micro-founded model of a monetary union," Journal of International Economics, Elsevier, vol. 67(2), pages 320-352, December.
    11. Holod, Dmytro & Reed, Robert III, 2004. "Regional spillovers, economic growth, and the effects of economic integration," Economics Letters, Elsevier, vol. 85(1), pages 35-42, October.
    12. Torben M. Andersen & Allan Sørensen, 2012. "Globalization, Tax Distortions, and Public-Sector Retrenchment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(2), pages 409-439, June.
    13. Jensen, Henrik, 1996. "The advantage of international fiscal cooperation under alternative monetary regimes," European Journal of Political Economy, Elsevier, vol. 12(3), pages 485-504, November.
    14. Holmlund, Bertil & Kolm, Ann-Sofie, 1999. "Economic Integration, Imperfect Competition, and International Policy Coordination," Working Paper Series 1999:7, Uppsala University, Department of Economics.
    15. Andersen, Torben M. & Sorensen, Jan Rose, 1995. "Unemployment and fiscal policy in an economic and monetary union," European Journal of Political Economy, Elsevier, vol. 11(1), pages 27-43, March.
    16. Emmanuelle Taugourdeau, 2002. "Imperfect Competition and Fiscal Policy Transmission in a Two-Country Economy," Open Economies Review, Springer, vol. 13(1), pages 47-71, January.
    17. Andersen, Torben M. & Spange, Morten, 2006. "International interdependencies in fiscal stabilization policies," European Economic Review, Elsevier, vol. 50(5), pages 1169-1195, July.
    18. Andersen, Torben M. & Rasmussen, Bo Sandemann & Sorensen, Jan Rose, 1996. "Optimal fiscal policy in open economies with labour market distortions," Journal of Public Economics, Elsevier, vol. 63(1), pages 103-117, December.
    19. Hettig, Thomas & M�ller, Gernot, 2017. "Fiscal policy coordination in currency unions at the effective lower bound," CEPR Discussion Papers 11780, C.E.P.R. Discussion Papers.
    20. Muhammad Zakaria & Samreen Shakoor, 2011. "Relationship Between Government Size and Trade Openness: Evidence from Pakistan," Transition Studies Review, Springer;Central Eastern European University Network (CEEUN), vol. 18(2), pages 328-341, December.

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