The relative size of government spending in the cooperative and non-cooperative scenario's can be judged by comparing (11.60) and (11.64). If there is nominal wage rigidity in both cc the higher spending it where point C designatL:

is obvious. With nomina locomotive policy. In the not take into account tha therefore both undere'

choose spending levels t hand, this external eft- , use of the locomotive IL.

The opposite holds if t is illustrated in Figure 11.

and uncoordinated actioi too high. The coordin..

of government spenu... 6 Up to this point we hi or real wage rigidity in where there is real wag(

wage rigidity in the for.

a: .d 0 < r < 1. Followl.., it is possible to derive the

(1 + 0 -

(1 + 9 — r).1

= (1 + 0)2 -“*

so that:

(1 +

gc- = [ 1 + 0 +

From (11.65) we can con under the symmL and (11.60). Furthermore

* it gN < gc and Ar. >

4.:erest rate is too hibri In Europe due to the eci s_..ce fiscal policy is a I spends too much in the 2

which yields the first-order conditions:

a(LG +q)

=ag (g + —P+) r (g* + — + og = o, a(LG + L'O

(11.62)

(11.63)

gN = (1 + — (c.

gc — gN = r + 0 +

[1 294 RR*

9sCal

, tries

,