Coordination of Fiscal Policy Among a Subset of Countries

Abstract

We set up a general equilibrium model with unemployment due to labour unions having wage bargaining power. There is a number of produced goods which are imperfect substitutes in consumption, and there is a number of countries producing each good. It is shown that coordination of fiscal policy among all countries is first best, non coordination at all is second best, whereas coordination among countries producing the same type of good (i.e. countries which are "most alike") is only third best. In spite of that, countries producing the same good have an incentive to coordinate their policies.

JEL Classification: F00