Working Paper BETA #2010-18

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Title : Fiscal policy efficiency and coordination: The New Open Economy Macroeconomics Approach

Author(s) : Gilbert Koenig, Irem Zeyneloglu

Abstract : The paper offers a survey of recent research on fiscal policy in both deterministic and stochastic models of the New Open Economy Macroeconomics (NOEM) initiated by Obstfeld and Rogoff (1995, 2002b). The survey includes a comparison of the implications of the deterministic benchmark model to the empirical evidence obtained in recent studies. It provides a detailed discussion of the recent extensions induced by the gap between theoretical and empirical implications. These extensions revise the traditionally studied aspects of fiscal issues such as the transmission channels of fiscal policy by introducing production specialization at the international level or by diversifying the pricing decisions of firms. They also cover current economic issues such as the effect of financial globalization on fiscal policy efficiency and the implication of a reduction in public employment in order to cut taxes. After presenting the basic features of a benchmark stochastic NOEM model for fiscal policy, the paper discusses the recent developments the gains from international fiscal policy cooperation with respect to gains from fiscal stabilization.

Key-words : New Open Economy Macroeconomics, fiscal policy, stochastic and deterministic general equilibrium models

JEL Classification : E62, E63, F41, F42