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Designing domestic institutions for international monetary policy cooperation: A Utopia?

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  • Bilbiie, Florin O.

Abstract

In a wide variety of international macroeconomic models monetary policy cooperation is optimal, non-cooperative policies are inefficient, but optimal policies can be attained non-cooperatively by optimal design of domestic institutions/contracts. We show that given endogenous institutional design, inefficiencies of non-cooperation cannot and will not be eliminated. We model the delegation stage explicitly and show that subgame perfect, credible contracts (chosen by governments based on individual rationality) are non-zero, but are different from optimal contracts and hence lead to inefficient equilibria. Optimal contracts require cooperation at the delegation stage, which is inconsistent with the advocated non-cooperative nature of the solution. A general solution method for credible contracts and an example from international monetary policy cooperation are considered. Our results feature delegation as an equilibrium phenomenon, explain inefficiencies of existing delegation schemes and hint to a potentially stronger role for supranational authorities in international policy coordination.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 30 (2011)
Issue (Month): 3 (April)
Pages: 393-409

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Handle: RePEc:eee:jimfin:v:30:y:2011:i:3:p:393-409

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Web page: http://www.elsevier.com/locate/inca/30443

Related research

Keywords: International monetary policy cooperation Institutions Equilibrium optimal delegation Inflation contracts Credible Subgame perfect contracts;

References

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  1. Benigno, Pierpaolo, 2002. "A simple approach to international monetary policy coordination," Journal of International Economics, Elsevier, vol. 57(1), pages 177-196, June.
  2. Persson, Torsten & Tabellini, Guido, 1995. "Double-Edged Incentives: Institutions and Policy Coordination," CEPR Discussion Papers 1141, C.E.P.R. Discussion Papers.
  3. Torsten Persson & Guido Tabellini, . "Monetary Cohabitation in Europe," Working Papers 96, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  4. Matthew B. Canzoneri & Dale W. Henderson, 1991. "Monetary Policy in Interdependent Economies: A Game-Theoretic Approach," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031787, January.
  5. Kohler, Marion, 2002. "Coalition formation in international monetary policy games," Journal of International Economics, Elsevier, vol. 56(2), pages 371-385, March.
  6. Jensen, Henrik, 2000. "Optimal monetary policy cooperation through state-independent contracts with targets," European Economic Review, Elsevier, vol. 44(3), pages 517-539, March.
  7. Giancarlo Corsetti & Paolo Pesenti, 2001. "Welfare And Macroeconomic Interdependence," The Quarterly Journal of Economics, MIT Press, vol. 116(2), pages 421-445, May.
  8. Chaim Fershtman & Kenneth L. Judd & Ehud Kalai, 1990. "Observable Contracts: Strategic Delegation and Cooperation," Discussion Papers 879, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, January.
  10. Hamada, Koichi, 1976. "A Strategic Analysis of Monetary Interdependence," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 677-700, August.
  11. Avinash Dixit & Henrik Jensen, 2003. "Common Agency with Rational Expectations: Theory and Application to a Monetary Union," Economic Journal, Royal Economic Society, vol. 113(489), pages 539-549, 07.
  12. Cooper, Russell & John, Andrew, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 441-63, August.
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