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Title: International Interdependencies in Fiscal Stabilization Policies

Author(s): Torben M Andersen and Morten Spange

Publication Date: October 2002

Keyword(s): automatic stabilizers, risk, spillover effects, stabilization policy and wage rigidities

Programme Area(s): International Macroeconomics

Abstract: Trade links imply that business cycle fluctuations are transmitted to trade partners. To the extent that fiscal policy can mitigate business cycle fluctuations this implies that there are international interdependencies in stabilization policies. We analyse the role of fiscal policy in mitigating risk or providing implicit insurance in the presence of capital market imperfections, and how this is affected by adjustment failures (rigid wages). It is shown that there is a welfare case for an active stabilization policy and that it is larger in the presence of adjustment failures (rigid wages). The international interdependency may in the absence of adjustment failures imply that non-cooperative stabilization policies entail excessive stabilization, whereas there is always insufficient stabilization in the presence of adjustment failures.

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Bibliographic Reference

Andersen, T and Spange, M. 2002. 'International Interdependencies in Fiscal Stabilization Policies'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=3580