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International Policy Cooperation and Model Uncertainty

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  • Holtham, Gerald
  • Hughes Hallett, Andrew

Abstract

The main obstacles to coordinating policies in practice are uncertainty about the correct model to use for policy design, and uncertainty about external variables. This paper examines the former problem. Numerical calculations using ten models from the recent Brookings Multicountry comparison exercise showed both policies and the gains to coordination are quite sensitive to model variations - and hence to model errors. A framework is therefore set up in which policy-makers are able to choose their model and their policies jointly in order to try and protect the gains from coordination from potential model misspecifications and/or disagreements over which model is most appropriate. That produces an alternative policy bargaining system and better results in terms of the success of coordination.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 190.

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Date of creation: Jul 1987
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Handle: RePEc:cpr:ceprdp:190

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Related research

Keywords: Bargaining; Coordination Policy Robustness; International Policy Cooperation; Model Uncertainty;

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Cited by:
  1. Jeffrey Frankel & Scott Erwin & Katharine Rockett, 1992. "A Note on Internationally Coordinated Policy Packages Intended to be Robust Under Model Uncertainty," NBER Working Papers 3747, National Bureau of Economic Research, Inc.
  2. A.J. Hallet, 1998. "When Do Target Zones Work? An Examination of Exchange Rate Targeting as a Device for Coordinating Economic Policies," Open Economies Review, Springer, vol. 9(2), pages 115-138, April.
  3. Jeffrey A. Frankel, 1989. "Obstacles to International Macroeconomic Policy Coordination," NBER Working Papers 2505, National Bureau of Economic Research, Inc.
  4. Beetsma, Roel & Debrun, Xavier & Klaassen, Franc, 2001. "Is Fiscal Policy Coordination in EMU Desirable?," CEPR Discussion Papers 3035, C.E.P.R. Discussion Papers.
  5. Eichengreen, Barry & Ghironi, Fabio, 1997. "European Monetary Unification and International Monetary Cooperation," Center for International and Development Economics Research, Working Paper Series qt10d518tg, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  6. Carlo Carraro, 1997. "Modelling International Policy Games: Lessons from European Monetary Coordination," Empirica, Springer, vol. 24(3), pages 163-177, October.
  7. Matthew B. Canzoneri & Hali J. Edison, 1989. "A new interpretation of the coordination problem and its empirical significance," International Finance Discussion Papers 340, Board of Governors of the Federal Reserve System (U.S.).
  8. Patrick Artus, 1992. "Passage à l'union économique et monétaire en Europe : effets sur la croissance et les politiques budgétaires," Économie et Prévision, Programme National Persée, vol. 106(5), pages 123-137.
  9. Thomas Willett, 1999. "Developments in the Political Economy of Policy Coordination," Open Economies Review, Springer, vol. 10(2), pages 221-253, May.

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