INTERNATIONAL FISCAL-POLICY COORDINATION AND ECONOMIC-GROWTH

This paper examines the effects of policy coordination in a two country model of endogenous growth. Governments choose taxes to provide public inputs and public consumption goods. Tax rates affect the rewards to investment and rates of economic growth. Two regimes are examined: one with independent policy-making, and one with policy coordination. Whatever the regime, the choice of public inputs is always efficient. Without coordination. however, governments choose inefficient tax rates. But taxes may be either higher or lower than under policy coordination. As a consequence, growth rates may be lower or higher than those under policy coordination.