Fiscal Policies and Endogenous Growth in Integrated Capital Markets

This paper examines the effects of policy coordination in a two-country world with endogenous growth and imperfect capital mobility.Public investment and a public consumption good are financed by a source-based capital-income tax. By comparing the cases in which countries do and do not coordinate their fiscal policies, it follows that spending on investment and redistribution can be inefficiently high if fiscal policies are not coordinated.This is caused by the negative effects of fiscal policy on economic growth abroad.This externality can dominate the well-known tax-base externality.Coordination of only investment policy decreases the inefficiency of that policy, but it increases the inefficiency of noncoordinated provision of the public good.