IDEAS home Printed from https://ideas.repec.org/a/bla/reviec/v32y2024i3p1341-1363.html
   My bibliography  Save this article

Global shocks, budgets deficits, and international fiscal policy coordination

Author

Listed:
  • Pierre‐Richard Agénor

Abstract

A simple two‐country model with trade, fiscal and interest rate externalities is used to study strategic interactions between national policymakers. Optimal fiscal policy internalizes a trade‐off between output stability and fiscal stability. With lump‐sum taxation, the noncooperative equilibrium is inefficient and both countries are better off under coordination. These results also hold if taxation is distortionary and trade generates a fiscal externality as well, regardless of how strong the preference for output stability is. In response to a negative global demand shock, consistent with the disruptions that occurred during the recent pandemic, the optimal policy response is to increase spending by more under cooperation. However, if budget deficits generate a sufficiently strong negative cross‐border externality through higher interest rates, the optimal response calls for lower spending under cooperation.

Suggested Citation

  • Pierre‐Richard Agénor, 2024. "Global shocks, budgets deficits, and international fiscal policy coordination," Review of International Economics, Wiley Blackwell, vol. 32(3), pages 1341-1363, August.
    • Handle: RePEc:bla:reviec:v:32:y:2024:i:3:p:1341-1363
    DOI: 10.1111/roie.12732
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/roie.12732
    Download Restriction: no
    File URL: https://libkey.io/10.1111/roie.12732?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Cooper, Richard N., 1985. "Economic interdependence and coordination of economic policies," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 23, pages 1195-1234, Elsevier.
    2. Ferré, Montserrat, 2008. "Fiscal policy coordination in the EMU," Journal of Policy Modeling, Elsevier, vol. 30(2), pages 221-235.
    3. Ostry, Jonathan D. & Ghosh, Atish R., 2016. "On the obstacles to international policy coordination," Journal of International Money and Finance, Elsevier, vol. 67(C), pages 25-40.
    4. Caporale, Guglielmo Maria & Girardi, Alessandro, 2013. "Fiscal spillovers in the Euro area," Journal of International Money and Finance, Elsevier, vol. 38(C), pages 84.1-84.16.
    5. Dennis Bonam & Jasper Lukkezen, 2019. "Fiscal and Monetary Policy Coordination, Macroeconomic Stability, and Sovereign Risk Premia," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(2-3), pages 581-616, March.
    6. Miyazawa, Kazutoshi & Ogawa, Hikaru & Tamai, Toshiki, 2019. "Capital market integration and fiscal sustainability," European Economic Review, Elsevier, vol. 120(C).
    7. Faccini, Renato & Mumtaz, Haroon & Surico, Paolo, 2016. "International fiscal spillovers," Journal of International Economics, Elsevier, vol. 99(C), pages 31-45.
    8. Levine, Paul & Brociner, Andrew, 1994. "Fiscal policy coordination and EMU : A dynamic game approach," Journal of Economic Dynamics and Control, Elsevier, vol. 18(3-4), pages 699-729.
    9. Giancarlo Corsetti & Gernot J. Müller, 2013. "Multilateral Economic Cooperation and the International Transmission of Fiscal Policy," NBER Chapters, in: Globalization in an Age of Crisis: Multilateral Economic Cooperation in the Twenty-First Century, pages 257-297, National Bureau of Economic Research, Inc.
    10. Marina Azzimonti & Eva de Francisco & Vincenzo Quadrini, 2014. "Financial Globalization, Inequality, and the Rising Public Debt," American Economic Review, American Economic Association, vol. 104(8), pages 2267-2302, August.
    11. Chang, Roberto, 1990. "International coordination of fiscal deficits," Journal of Monetary Economics, Elsevier, vol. 25(3), pages 347-366, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Maebayashi, Noritaka, 2023. "The pace of fiscal consolidations, fiscal sustainability, and welfare: An overlapping generations approach," Journal of Macroeconomics, Elsevier, vol. 75(C).
    2. Maebayashi, Noritaka, 2021. "The pace of fiscal consolidations, fiscal sustainability, and welfare: An overlapping generations approach," MPRA Paper 112593, University Library of Munich, Germany, revised 30 Feb 2022.
    3. Hefeker, Carsten, 2022. "Policy coordination under model disagreement and asymmetric shocks," Economic Modelling, Elsevier, vol. 114(C).
    4. Ferrara, Laurent & Metelli, Luca & Natoli, Filippo & Siena, Daniele, 2021. "Questioning the puzzle: Fiscal policy, real exchange rate and inflation," Journal of International Economics, Elsevier, vol. 133(C).
    5. Johannes Matschke, 2021. "National Interests, Spillovers and Macroprudential Coordination," Research Working Paper RWP 21-13, Federal Reserve Bank of Kansas City.
    6. Patrick Blagrave & Giang Ho & Ksenia Koloskova & Mr. Esteban Vesperoni, 2018. "Cross-Border Transmission of Fiscal Shocks: The Role of Monetary Conditions," IMF Working Papers 2018/103, International Monetary Fund.
    7. Hefeker, Carsten, 2023. "Policy competition, imitation and coordination under uncertainty," Economic Systems, Elsevier, vol. 47(1).
    8. Lilia Cavallari & Simone Romano, 2016. "Foresight And The Macroeconomic Impact Of Fiscal Policy: Evidence For France, Germany And Italy," Working Papers 0216, CREI Università degli Studi Roma Tre, revised 2016.
    9. Arcalean, Calin, 2018. "Dynamic fiscal competition: A political economy theory," Journal of Public Economics, Elsevier, vol. 164(C), pages 211-224.
    10. Michael B. Devereux, 2018. "International Fiscal Spillovers: A Review Essay," Korean Economic Review, Korean Economic Association, vol. 34, pages 29-50.
    11. Ilori, Ayobami E. & Paez-Farrell, Juan & Thoenissen, Christoph, 2022. "Fiscal policy shocks and international spillovers," European Economic Review, Elsevier, vol. 141(C).
    12. Markus Eller & Martin Feldkircher & Florian Huber, 2017. "How would a fiscal shock in Germany affect other European countries? Evidence from a Bayesian GVAR model with sign restrictions," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 54-77.
    13. Kazutoshi Miyazawa & Hikaru Ogawa & Toshiki Tamai, 2018. "Tax Competition and Fiscal Sustainability," CIRJE F-Series CIRJE-F-1104, CIRJE, Faculty of Economics, University of Tokyo.
    14. Dragomirescu-Gaina, Catalin & Philippas, Dionisis, 2015. "Strategic interactions of fiscal policies in Europe: A global VAR perspective," Journal of International Money and Finance, Elsevier, vol. 59(C), pages 49-76.
    15. Natoli, Filippo & Metelli, Luca, 2018. "The international transmission of US fiscal shocks," MPRA Paper 84207, University Library of Munich, Germany.
    16. Deniz Sevinc & Edgar Mata Flores, 2021. "Macroeconomic and financial implications of multi‐dimensional interdependencies between OECD countries," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 741-776, January.
    17. Laurent Ferrara & Luca Metelli & Filippo Natoli & Daniele Siena, 2020. "Questioning the puzzle: Fiscal policy, exchange rate and inflation," Working papers 752, Banque de France.
    18. Luca Metelli & Filippo Natoli, 2021. "The International Transmission of US Tax Shocks: A Proxy-SVAR Approach," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 69(2), pages 325-356, June.
    19. Miyazawa, Kazutoshi & Ogawa, Hikaru & Tamai, Toshiki, 2019. "Capital market integration and fiscal sustainability," European Economic Review, Elsevier, vol. 120(C).
    20. Jensen, Henrik, 1996. "The advantage of international fiscal cooperation under alternative monetary regimes," European Journal of Political Economy, Elsevier, vol. 12(3), pages 485-504, November.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:reviec:v:32:y:2024:i:3:p:1341-1363. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0965-7576 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.