Fiscal policy coordination with demand spillovers and unionised labour markets

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