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
JEL(s): E62, F41
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.