COORDINATION OF FISCAL-POLICY AMONG A SUBSET OF COUNTRIES

A general equilibrium model, with unemployment due to labour unions ha ving wage bargaining power, is set up. There are a number of produced goods which are imperfect substitutes in consumption, and there are a number of countries producing each good It is shown that coordination of fiscal policy among all countries is first best, no coordination at all is second best, whereas coordination among countries producing th e same type of good (i.e., countries which are ''most alike'') is only third best. In spite of this, countries producing the same good have an incentive to coordinate their policies.