The Korean Economic Review
International Fiscal Coordination under Imperfect Information
Jung Soo Park / Kang Oh Yi / Do Young KimYear 2007Vol. 23No. 2
This study investigates the issue of optimal fiscal policies andinternational fiscal coordination across economies in the world ofuncertainties and imperfect information. It lays out the strategic problems ofcoordination that we inevitably encounter when the integration ofinternational capital markets is a reality and when we do not have enoughinformation about other countries. In this international environment, theresults show that there exists a precommitment mechanism with noncooperativedynamic equilibria, which would render us a higher level ofwelfare than the non-coordiation outcome. In these equilibria, the phases oflow outcomes with high interest rates will appear intermittently between thephases of high outcomes with low interest rates. Under the proposed system,the results indicate that welfare will be reduced as uncertainty increases,whereas the gains from adopting this proposed mechanism will grow as thenumber of countries with open capital markets increases.JEL Classification: F61, F42Keywords: Fiscal Policy, Policy Coordination, Imperfect