International Interdependencies in Fiscal Stabilization Policies

38 Pages Posted: 12 Nov 2002

See all articles by Torben M. Andersen

Torben M. Andersen

University of Aarhus - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Morten Spange

Aarhus University - Department of Economics and Business Economics

Date Written: October 2002

Abstract

Trade links imply that business cycle fluctuations are transmitted to trade partners. To the extent that fiscal policy can mitigate business cycle fluctuations this implies that there are international interdependencies in stabilization policies. We analyse the role of fiscal policy in mitigating risk or providing implicit insurance in the presence of capital market imperfections, and how this is affected by adjustment failures (rigid wages). It is shown that there is a welfare case for an active stabilization policy and that it is larger in the presence of adjustment failures (rigid wages). The international interdependency may in the absence of adjustment failures imply that non-cooperative stabilization policies entail excessive stabilization, whereas there is always insufficient stabilization in the presence of adjustment failures.

Keywords: Risk, wage rigidities, stabilization policy, automatic stabilizers, spillover effects

JEL Classification: E32, E60, F42

Suggested Citation

Andersen, Torben M. and Spange, Morten, International Interdependencies in Fiscal Stabilization Policies (October 2002). Available at SSRN: https://ssrn.com/abstract=348601

Torben M. Andersen (Contact Author)

University of Aarhus - Department of Economics ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Centre for Economic Policy Research (CEPR)

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IZA Institute of Labor Economics

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Morten Spange

Aarhus University - Department of Economics and Business Economics ( email )

Fuglesangs Allé 4
Aarhus V
Denmark
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+45 8 613 6334 (Fax)

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