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Coordination of Fiscal Policy among a Subset of Countries.

  • Economics


A general equilibrium model, with unemployment due to labor unions having wage bargaining power, is set up. There are a number of produced goods which are imperfect substitutes in consumption and there are a number of countries producing each good. It is shown that coordination of fiscal policy among all countries is first best, no coordination at all is second best, whereas coordination among countries producing the same type of good (i.e., countries which are 'most alike') is only third best. In spite of this, countries producing the same good have an incentive to coordinate their policies. Copyright 1996 by The editors of the Scandinavian Journal of Economics.

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