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 policymarkers are trivial and thus cooperative and non-cooperative government policies coincide. It is well known that this holds for tariff policies. However, this paper demonstrates the result does not apply to fiscal policy. In addition, the paper analyzes how optimally coordinated fiscal policies differ from non-cooperative policies. It finds that, relative to optimally coordinated levels, non-cooperative 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.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 349-376 |
| Number of pages | 28 |
| Journal | Journal of Monetary Economics |
| Volume | 19 |
| Issue number | 3 |
| DOIs | |
| State | Published - May 1987 |
| Externally published | Yes |
Bibliographical note
Funding Information:*Andrew Abel, David Backus, Robert Hodrick, Dennis Podlesak. Paul Richardson, Thomas Sargent, and James Schmitz provided helpful comments. Edward Prescott provided valuable guidance at an early stage of this project. Kathy Rolfe provided useful editorial assistance. This project was undertaken in connection with Sloan Foundation Grant 85-4-3. called ‘Coordination of Macroeconomic Policies in Dynamic Open Economies’. The views expressed herein are my own and not necessarily those of the Sloan Foundation, the Federal Reserve Bank of Minneapolis, or the Federal Reserve System.
