Nearly all existing studies of international coordination of fiscal deficits focus on aggregate demand aspects of the problem. In contrast, this paper adopts a dynamic general equilibrium perspective and emphasizes the public finance side of fiscal deficits. In a world with international capital mobility, the fiscal deficit of any single government affects world interest rates and therefore influences intertemporal resource allocation in all countries. The paper shows that these international externalities may result in inefficiently large fiscal deficits, high interest rates, and low levels of welfare if international policy coordination is absent.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics