Working Paper: CEPR ID: DP1391
Authors: Huw David Dixon; Michele Santoni
Abstract: We explore the incentives for governments to cooperate by expanding expenditure. We model three countries, of which two are in a monetary union (the EU). The labour markets of both EU countries are unionized, and there is involuntary unemployment. We use a general model of bargaining, and explore in some detail the intra- and inter-country effects of changes in bargaining power. We then examine optimal government expenditure in each EU country. We find that there is a positive spillover, and that expenditures are strategic complements. The coordinated equilibrium involves higher expenditure than the uncoordinated equilibrium.
Keywords: imperfect competition; fiscal policy; open economy; macroeconomics
JEL Codes: E62; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government Expenditure in Country A (H59) | Welfare in Country B (I38) |
| Welfare in Country B (I38) | Government Expenditure in Country B (H59) |
| Government Expenditure in Country A (H59) | Government Expenditure in Country B (H59) |