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Fiscal Policy in the New Open Economy. Macroeconomics and Prospects for Fiscal Policy Coordination

This paper reviews the analysis of fiscal policy in the new open economy macroeconomics literature, in view of increasing interest in the question of transmission and coordination of policies across countries, stirred by developments in this literature and by the formation of the euro area. The analysis focuses on two main points: (i) the identification of welfare spillover e.ects to third countries; and (ii) the assessments made so far of the potential gains from pursuing non-cooperative and cooperative fiscal stabilisation policies. Regarding welfare spillovers, some additional results are derived to examine whether the exchange rate regime (flexible or fixed) matters for the size of these spillovers, and whether the type of policy pursued (balanced-budget or debt- financed) matters. Fixed exchange rates only seem to postpone the costs from the short to the long run, but the type of policy is crucial in determining the welfare impact of fiscal expansions. With respect to policy coordination, attention is drawn to the need to reflect on a potential role for fiscal policy as a stabilisation tool, and on possible interactions between fiscal and monetary policy.

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Paper provided by European Network of Economic Policy Research Institutes in its series Economics Working Papers with number 021.

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Length: 49 pages
Date of creation: Jun 2003
Date of revision:
Handle: RePEc:epr:enepwp:wp021
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  1. Lane, P, 1999. "The New Open Economy Macroeconomics: A Survey," Trinity Economics Papers 993, Trinity College Dublin, Department of Economics.
  2. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," CEPR Discussion Papers 1131, C.E.P.R. Discussion Papers.
  3. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Solving Dynamic General Equilibrium Models Using a Second-Order Approximation to the Policy Function," Departmental Working Papers 200106, Rutgers University, Department of Economics.
  4. Ganelli, Giovanni, 2003. "Useful government spending, direct crowding-out and fiscal policy interdependence," Journal of International Money and Finance, Elsevier, vol. 22(1), pages 87-103, February.
  5. Ganelli, Giovanni & Lane, Philip R., 2002. "Dynamic General Equilibrium Analysis: The Open Economy Dimension," CEPR Discussion Papers 3540, C.E.P.R. Discussion Papers.
  6. Tille, Cedric, 2001. "The role of consumption substitutability in the international transmission of monetary shocks," Journal of International Economics, Elsevier, vol. 53(2), pages 421-444, April.
  7. Obstfeld, Maurice & Rogoff, Kenneth, 2001. "Global Implications of Self-Oriented National Monetary Rules," Center for International and Development Economics Research, Working Paper Series qt6412m5b7, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  8. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, August.
  9. Canzoneri, Matthew B & Minford, Patrick, 1986. "When International Policy Coordination Matters: An Empirical Analysis," CEPR Discussion Papers 119, C.E.P.R. Discussion Papers.
  10. Giovanni Ganelli, 2002. "Fiscal Policy Rules in an Overlapping Generations Model with Endogenous Labour Supply," Trinity Economics Papers 200215, Trinity College Dublin, Department of Economics.
  11. Laurence H. Meyer & Brian M. Doyle & Joseph E. Gagnon & Dale W. Henderson, 2002. "International coordination of macroeconomic policies: still alive in the new millennium?," International Finance Discussion Papers 723, Board of Governors of the Federal Reserve System (U.S.).
  12. Caselli, Paola, 2001. "Fiscal consolidation under fixed exchange rates," European Economic Review, Elsevier, vol. 45(3), pages 425-450, March.
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