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The Benefits of International Policy Coordination Revisited

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Author Info

  • Jaromir Benes
  • Michael Kumhof
  • Douglas Laxton
  • Dirk Muir
  • Susanna Mursula

Abstract

This paper uses two of the IMF’s DSGE models to simulate the benefits of international fiscal and macroprudential policy coordination. The key argument is that these two policies are similar in that, unlike monetary policy, they have long-run effects on the level of GDP that need to be traded off with short-run effects on the volatility of GDP. Furthermore, the short-run effects are potentially much larger than those of conventional monetary policy, especially in the presence of nonlinearities such as the zero interest rate floor, minimum capital adequacy regulations, and lending risk that depends in a convex fashion on loan-to-value ratios. As a consequence we find that coordinated fiscal and/or macroprudential policy measures can have much larger stimulus and spillover effects than what has traditionally been found in the literature on conventional monetary policy.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/262.

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Length: 53
Date of creation: 23 Dec 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/262

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Related research

Keywords: Fiscal policy; Macroprudential Policy; Monetary policy; Stabilization measures; International cooperation; Economic models; International Policy Coordination; International Spillovers; Nonlinearities; Fiscal Multipliers; Macrofinancial Linkages; Prudential Regulation; inflation; real interest rates; nominal interest rates; monetary economics; terms of trade; foreign currency; real value; aggregate demand; terms of trade shock; foreign exchange; real output; financial stability; increase in inflation; price level; nominal rate of return; relative price; inflationary pressures; inflation objective; rate of inflation; inflation targeting;

This paper has been announced in the following NEP Reports:

References

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  1. Angeloni, Ignazio & Faia, Ester, 2013. "Capital regulation and monetary policy with fragile banks," Journal of Monetary Economics, Elsevier, vol. 60(3), pages 311-324.
  2. Maurice Obstfeld & Kenneth Rogoff, 2003. "Global Implications of Self-Oriented National Monetary Rules," Macroeconomics 0303018, EconWPA.
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  6. Vasco Cúrdia & Michael Woodford, 2009. "Credit spreads and monetary policy," Staff Reports 385, Federal Reserve Bank of New York.
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  9. Jocelyn Horne & Paul R. Masson, 1988. "Scope and Limits of International Economic Cooperation and Policy Coordination," IMF Staff Papers, Palgrave Macmillan, vol. 35(2), pages 259-296, June.
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  13. Michael Kumhof & Dirk Muir & Carlos de Resende & Jan in ‘t Veld & René Lalonde & Davide Furceri & Annabelle Mourougane & John Roberts & Stephen Snudden & Mathias Trabandt & Günter Coenen &, 2010. "Effects of Fiscal Stimulus in Structural Models," IMF Working Papers 10/73, International Monetary Fund.
  14. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. "When Is the Government Spending Multiplier Large?," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 78 - 121.
  15. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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  17. Eisner, Robert, 1969. "Fiscal and Monetary Policy Reconsidered," American Economic Review, American Economic Association, vol. 59(5), pages 897-905, December.
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  19. repec:nbr:nberre:0126 is not listed on IDEAS
  20. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
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  22. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
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