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A new interpretation of the coordination problem and its empirical significance

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  • Matthew B. Canzoneri
  • Hali J. Edison

Abstract

In this paper, we discuss a new interpretation of what might be meant by the "coordination" of policies; in this interpretation, the policymakers are selecting a noncooperative solution rather than a cooperative solution. The new interpretation is suggested by the fact that games typically have a large number of Nash solutions, and players are not indifferent as to which occurs. The multiplicity of solutions may be due to information sharing and surveillance, the choice of policy instruments, or the adoption of reputational strategies in repeated versions of the game. The "coordination" problem: results from policymakers' desire to coordinate on a good Nash equilibrium. ; In section I, we use the simulations of the MCM and the DECO model that were prepared for the May 1988 FRB Monetary Conference to derive reduced forms for inflation and output, and we simulate a one-shot game. We calculate an uncoordinated Nash solution, a Nash solution coordinated on the low deficit assumption, two more Nash solutions coordinated on instruments as well as the low deficit assumption, and finally a cooperative solution. By comparing them, we hope to assess the empirical relevance of the new interpretation of the coordination problem. The Nash solutions based on the low deficit assumptions are to be viewed as approximations to coordinated Nash solutions based on information sharing and surveillance, always overstating their case. ; In section II, we provide new simulations from the MCM to illustrate the dynamic paths of four possible outcomes under coordination and to look for indicators. The simulations consider the two scenarios for U.S. government purchases--low and high. Given these two scenarios, two sets of possible responses are considered. The first set of responses correspond to when the policymakers are correct in predicting the path of the U.S. deficit. The second set of responses occur when the policymakers are wrong. The simulations show how much better off each country is when the policymakers get the shock right; they also suggest which indicator variables might be used as early warnings of mistaken assumptions. ; In section III, we study a game that centers on instrument selection instead of information sharing and surveillance. Policymakers in the United States, Germany and Japan inherit inflation problems and full employment. We begin by calculating a Nash solution in which the United States is using the interest rate, while Japan and Germany are using money supply. Then we see how the outcome changes if the United States switches to the money supply or if the policymakers decide to cooperate. ; We find, measuring importance by the percentage decrease in losses, that coordination on instruments is about ten times as important as cooperation, and we find that coordination on information and surveillance is about ten times as important as coordination on instruments. The results from our one-shot games are reinforced by the simulation exercise. Furthermore, the simulations suggest that interest rates or exchange rates would be good early warning indicators of mistaken assumptions about the size of the U.S. deficit; the current account would not, since it adjusts very slowly.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 340.

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Date of creation: 1989
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Handle: RePEc:fip:fedgif:340

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  1. Canzoneri, Matthew B. & Henderson, Dale W., 1988. "Is sovereign policymaking bad?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 28(1), pages 93-140, January.
  2. Taylor, John B., 1985. "International coordination in the design of macroeconomic policy rules," European Economic Review, Elsevier, vol. 28(1-2), pages 53-81.
  3. Stanley Fischer, 1987. "International Macroeconomic Policy Coordination," NBER Working Papers 2244, National Bureau of Economic Research, Inc.
  4. Frankel, Jeffrey A. & Rockett, Katherine E., 1987. "International Macroeconomic Policy Coordination When Policy-Makers Disagree on the Model," Department of Economics, Working Paper Series qt6ct8k549, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  5. Currie, David & Levine, Paul L & Vidalis, Nic, 1987. "International Cooperation and Reputation in an Empirical Two-Bloc Model," CEPR Discussion Papers 198, C.E.P.R. Discussion Papers.
  6. Edison, Hali J. & Marquez, Jaime R. & Tryon, Ralph W., 1987. "The structure and properties of the Federal Reserve Board Multicountry Model," Economic Modelling, Elsevier, vol. 4(2), pages 115-315, April.
  7. Holtham, Gerald & Hughes Hallett, Andrew, 1987. "International Policy Cooperation and Model Uncertainty," CEPR Discussion Papers 190, C.E.P.R. Discussion Papers.
  8. Warwick J. McKibbin & Jeffrey Sachs, 1986. "Coordination of Monetary and Fiscal Policies in the OECD," NBER Working Papers 1800, National Bureau of Economic Research, Inc.
  9. Hali J. Edison & Ralph Tryon, 1986. "An empirical analysis of policy coordination in the United States, Japan and Europe," International Finance Discussion Papers 286, Board of Governors of the Federal Reserve System (U.S.).
  10. Atish R. Ghosh & Paul R. Masson, 1988. "International Policy Coordination in a World with Model Uncertainty," IMF Staff Papers, Palgrave Macmillan, vol. 35(2), pages 230-258, June.
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Cited by:
  1. Laurence H. Meyer & Brian M. Doyle & Joseph E. Gagnon & Dale W. Henderson, 2002. "International coordination of macroeconomic policies: still alive in the new millennium?," International Finance Discussion Papers 723, Board of Governors of the Federal Reserve System (U.S.).
  2. Canzoneri, Matthew B. & Cumby, Robert E. & Diba, Behzad T., 2005. "The need for international policy coordination: what's old, what's new, what's yet to come?," Journal of International Economics, Elsevier, vol. 66(2), pages 363-384, July.
  3. Thomas Willett, 1999. "Developments in the Political Economy of Policy Coordination," Open Economies Review, Springer, vol. 10(2), pages 221-253, May.
  4. Peter Mooslechner & Martin Schuerz, 1999. "International Macroeconomic Policy Coordination: Any Lessons for EMU? A Selective Survey of the Literature," Empirica, Springer, vol. 26(3), pages 171-199, September.
  5. Focco W. Vijselaar, 2000. "Macroeconomic Policy Co-ordination in the Euro Area," MEB Series (discontinued) 2000-5, Netherlands Central Bank, Monetary and Economic Policy Department.

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