Coordination of Fiscal Policies in a World Economy

Posted: 8 Aug 2015

See all articles by Patrick J. Kehoe

Patrick J. Kehoe

Federal Reserve Bank of Minneapolis - Research Department; University of Minnesota - Twin Cities - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: 1987

Abstract

This paper provides a simple counterexample to the standard belief that in a world economy in which all countries are small, strategic interactions between policymakers are trivial and thus cooperative and noncooperative government policies coincide. It is well known that this holds for tariff policies. However, this paper demonstrates the result does not apply to government policies generally. Indeed, this paper presents a simple counterexample for the case of fiscal policy. In addition, the paper analyzes how optimally coordinated fiscal policies differ from noncooperative policies. It finds that, relative to optimally coordinated levels, noncooperative government spending can be too high or too low, depending on the sign of a transmission effect which captures the overall effect countries’ actions have on each other.

Suggested Citation

Kehoe, Patrick J., Coordination of Fiscal Policies in a World Economy (1987). Journal of Monetary Economics, Vol. 19, p. 349, 1987; Sloan Foundation Economics Research Paper No. 2640698. Available at SSRN: https://ssrn.com/abstract=2640689

Patrick J. Kehoe (Contact Author)

Federal Reserve Bank of Minneapolis - Research Department ( email )

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University of Minnesota - Twin Cities - Department of Economics ( email )

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United States

National Bureau of Economic Research (NBER) ( email )

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