Policy coordination under model disagreement and asymmetric shocks

The paper analyzes the incentives for governments to coordinate their policies internationally when there is model disagreement and parameter uncertainty in the presence of symmetric or asymmetric shocks. If countries disagree on how policies affect the economies and where shocks can be potentially asymmetric, uncertainty and the type of shocks determine whether countries want to cooperate at all. Larger uncertainty with respect to policy spillovers as well as asymmetry of shocks make coordination more attractive if countries have model disagreement. Uncertainty and asymmetric shocks can substitute for model agreement. The analysis rationalizes cases like the European Monetary Union that are difficult to explain by standard theories.