DO STRUCTURAL ASYMMETRIES INCREASE THE GAINS FROM INTERNATIONAL FISCAL POLICY COORDINATION?

The paper studies international coordination of fiscal stabilization policies in a two-country stochastic general equilibrium model. The countries are assumed to differ in the sense that wages in one country are flexible whereas wages in the other country are rigid in real terms. It is found that for the country with rigid wages it will always be optimal with procyclical tax revenues whereas for the flex wage country the result is ambiguous. Comparing the uncoordinated and coordinated policies, it is found that the coordinated policies may be either more or less procyclical than in the decentralized equilibrium. Quantitatively the additional gains from a utilitarian fiscal policy relative to the decentralized equilibrium are small. Copyright © 2007 The Author; Journal compilation © 2007 Blackwell Publishing Ltd and The University of Manchester.