Growth, Human Capital Spillovers and International Policy Coordination

Abstract

The paper is concerned with public policy and economic development in a world of interdependent economies. Its objective is to show how the international coordination of economic policy is a means of promoting growth across countries. The analysis is based on a two-country endogenous growth model in which the production of human capital depends on country-specific tax-financed public expenditure and worldwide previously accumulated knowledge. We consider optimal policy as the outcome of a dynamic game between benevolent governments. We show that both growth (which itself has no normative significance) and welfare are, indeed, higher under cooperation than under non-cooperation.