In this paper we study the adjustment of a N-country world economy to an unfavourable common supply shock. We show that world-wide monetary policy coordination is essential to achieve an optimal adjustment to the common shock, but that its actual implementation requires careful design to ensure that each country finds it optimal to join and to remain faithful to the coordination agreement. We then construct alternative coordination mechanisms which implement the first-best response to the common shock, discuss their main properties and rank them according to different criteria of desirability.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
1180.
Find related papers by JEL classification: D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy-Making and Implementation E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
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