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Journal of Economic Integration 2005 March;20(1) :1-25.
DOI: https://doi.org/10.11130/jei.2005.20.1.1
Fiscal Consolidation: An Exercise in the Methodology of Coordination
Guglielmo Maria Caporale
Michael Chui
Stephen G. Hall and 
Brian Henry 
London South Bank University and London Metropolitan University
European Central Bank
Imperial College Management School
Oxford University
Copyright ©2005 Journal of Economic Integration
ABSTRACT

This paper outlines a new methodology for the study of international policy coordination, which builds on two separate approaches previously used in the literature: optimal simple rules, and game-theoretic analysis. The new approach is illustrated by using the example of a changed target for the debt-income ratio in the G-3. The results suggest that there are few policy externalities when only fiscal policy is coordinated, whilst coordination of both fiscal and monetary policy results in substantial externalities and welfare improvements. Our findings reflect the fact that, unlike earlier studies, we focus on the strategic interaction between (domestic) policy makers, as well as the standard exchange rate and interest rate transmission mechanisms.

Keywords: Optimal Control | Inflation Targets | Fiscal Consolidation | International Policy Coordination
 
REFERENCE
1. Barro, R.J. (1989), "The Ricardian approach to budget deficits", Journal of Economic Perspectives, 3, 2, 37-54.
2. Bartolini, L., Razin, A. and S. Symanski (1995), "G-7 fiscal restructuring in the 1990s: macroeconomic effects", Economic Policy, 20, 109-146.
3. Bryant, R. (1995), "International Coordination of National Stabilisation Policies", The Brookings Institution, Washington DC.
4. Bryant, R.C. and L. Zhang (1996), "Intertemporal fiscal policy in macroeconomic models: introduction and major alternatives", Brookings Discussion Papers in Economics, no. 123.
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