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Title: Is Coordination of Fiscal Deficits Necessary?

Author(s): Harry Huizinga and Soren Bo Nielsen

Publication Date: July 1998

Keyword(s): Deficits and Fiscal Rules

Programme Area(s): International Macroeconomics

Abstract: National budget deficits can create externalities through their effects on international interest rates. This paper examines the scope for fiscal rules restricting government borrowing for the case where government revenues (on the margin) stem from capital income taxation. There is no need to coordinate national borrowing, if governments have access to both a saving and an investment tax instrument. In the absence of a saving tax, however, national fiscal policies affect welfare abroad through the international interest rate. A reduction in first period deficits tied to increased government spending later is always welfare improving. Reducing first period deficits without further coordination of subsequent tax and spending policies will generally not improve welfare.

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Bibliographic Reference

Huizinga, H and Nielsen, S. 1998. 'Is Coordination of Fiscal Deficits Necessary?'. London, Centre for Economic Policy Research.