Is Coordination of Fiscal Deficits Necessary?
Centre for Economic Policy Research Discussion Paper Series No. 1936
Posted: 29 Sep 1998
Date Written: July 1998
National budget deficits can create externalities through their effects on international interest rates. This paper examines the scope for fiscal rules restricting government borrowing for the case where government revenues (on the margin) stem from capital income taxation. There is no need to coordinate national borrowing, if governments have access to both a saving and an investment tax instrument. In the absence of a saving tax, however, national fiscal policies affect welfare abroad through the international interest rate. A reduction in first period deficits tied to increased government spending later is always welfare improving. Reducing first period deficits without further coordination of subsequent tax and spending policies will generally not improve welfare.
JEL Classification: F36, H87
Suggested Citation: Suggested Citation