Government Budget Deficits in Large Open Economies
38 Pages Posted: 6 Jun 2011
Date Written: May 31, 2011
Abstract
Large and growing levels of public debt in the United States, United Kingdom, Japan and the Euro Area raise new interest in the cross-country effects of a large open economy’s deficits. We consider a dynamic optimizing model with costly tax collection and exogenously given public spending and initial debt. We ask whether the externalizes associated with an individual country’s deficits are positive or negative. We characterize the path of taxes in the Nash equilibrium where policy makers act nationalistically and compare this outcome to the global optimal outcome.
Keywords: fiscal policy, international policy coordination, optimal taxation
JEL Classification: E620, F420, H210
Suggested Citation: Suggested Citation