FISCAL-POLICY COORDINATION WITH DEMAND SPILLOVERS AND UNIONIZED LABOR-MARKETS

We explore the incentives for governments to cooperate by expanding ex penditure. We have three countries: two are in a monetary union (the E MU). The labour markets of both the EMU countries are unionised, and t here is involuntary unemployment in equilibrium. We explore the intra and intercountry effects of changes in bargaining power. We then exami ne optimal government expenditures in each EMU country; we find that t here is a positive spillover, and that expenditures are strategic comp lements. The coordinated equilibrium involves higher expenditure than the uncoordinated equilibrium.