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Global public goods, fiscal policy coordination, and welfare in the world economy

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  • Pierre-Richard Agénor
  • Luiz Awazu Pereira da Silva

Abstract

A two-region endogenous growth model of the world economy with local and global public goods is used to study strategic interactions between national fiscal authorities. Distortionary levies are used to finance infrastructure investment at home and to generate resources that are transferred to a global public fund for the production of vaccines, which contribute to individual health in both regions. While the global public good is nonexcludable, it is partially rival - its distribution in each region is subject to congestion. Under financial autarky, the cooperative equilibrium is efficient because the benefits of vaccines are fully internalized. Under financial openness, the cooperative equilibrium is also efficient because it preserves the tax base by internalizing the cross-border leakages associated with capital flows. Similar results hold when the health levy takes the form of a wealth tax. However, optimal tax rates are not necessarily higher under cooperation---an important consideration from a policy perspective. Simple numerical experiments are performed to calculate the optimal rates and the gain from cooperation under alternative regimes.

Suggested Citation

  • Pierre-Richard Agénor & Luiz Awazu Pereira da Silva, 2023. "Global public goods, fiscal policy coordination, and welfare in the world economy," BIS Working Papers 1106, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:1106
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    More about this item

    Keywords

    global public goods; endogenous growth; fiscal policy coordination; optimal taxation;
    All these keywords.

    JEL classification:

    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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