This study investigates the issue of optimal fiscal policies and
international fiscal coordination across economies in the world of
uncertainties and imperfect information. It lays out the strategic problems of
coordination that we inevitably encounter when the integration of
international capital markets is a reality and when we do not have enough
information about other countries. In this international environment, the
results show that there exists a precommitment mechanism with noncooperative
dynamic equilibria, which would render us a higher level of
welfare than the non-coordiation outcome. In these equilibria, the phases of
low outcomes with high interest rates will appear intermittently between the
phases 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 the
number of countries with open capital markets increases.
JEL Classification: F61, F42
Keywords: Fiscal Policy, Policy Coordination, Imperfect