DP420 The Welfare Economics of Cooperative and Uncooperative Fiscal Policy

Author(s): Willem H. Buiter, Kenneth Kletzer
Publication Date: May 1990
Keyword(s): Fiscal Policy, Policy Coordination, Social Welfare
JEL(s): 024, 111, 411, 441
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=420

In a competitive two-country overlapping generations model with perfect capital mobility, a plan that is individually Pareto optimal (that is Pareto optimal with respect to individual preferences) can be sustained without coordination of national fiscal policies where the fiscal arsenal is restricted to lump-sum taxes and government borrowing. Cooperation is required to achieve a Pareto optimum with respect to the two utilitarian national social welfare functions. Cooperation and international side payments are required to achieve an optimum with respect to a utilitarian global social welfare functi.