DP1391 International Fiscal Policy Coordination with Demand Spillovers and Labour Unions
|Author(s):||Huw David Dixon, Michele Santoni|
|Publication Date:||April 1996|
|Keyword(s):||Fiscal Policy, Imperfect Competition, Open Economy Macroeconomics|
|Programme Areas:||Human Resources|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=1391|
We explore the incentives for governments to cooperate by expanding expenditure. We model three countries, of which two are in a monetary union (the EU). The labour markets of both EU countries are unionized, and there is involuntary unemployment. We use a general model of bargaining, and explore in some detail the intra- and inter-country effects of changes in bargaining power. We then examine optimal government expenditure in each EU country. We find that there is a positive spillover, and that expenditures are strategic complements. The coordinated equilibrium involves higher expenditure than the uncoordinated equilibrium.