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THE TERMS OF TRADE AND THE INTERNATIONAL COORDINATION OF FISCAL POLICY
Author(s) -
DEVEREUX MICHAEL B.
Publication year - 1991
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1991.tb00857.x
Subject(s) - economics , nash equilibrium , distortion (music) , welfare , outcome (game theory) , stock (firearms) , general equilibrium theory , fiscal policy , microeconomics , monetary economics , terms of trade , macroeconomics , international economics , market economy , electronic engineering , mechanical engineering , amplifier , cmos , engineering
This paper develops an example of a noncooperative game between fiscal authorities in two countries. The key strategic link between countries is the terms of trade. An equilibrium without cooperation is characterized by excessive tax rates and public spending levels in each country. The outcome is analogous to the Nash equilibrium of the static optimal tarif game in trade theory. But in this model there is also a dynamic distortion caused by noncooperative behaviour. This dynamic distortion depresses capital accumulation and reduces the equilibrium capital stock in each country. Numerical examples suggest a significant welfare benefit of cooperation.