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International Coordination in the Design of Macroeconomic Policy Rules

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  • John B. Taylor

Abstract

The paper examines international issues that arise in the design and evaluation of macroeconomic policy rules. It begins with a theoretical investigation of the effects of fiscal and monetary policy in a two-country rational expectations model with staggered wage and price setting and with perfect capital mobility. The results indicate that with the appropriate choice of policies and with flexible exchange rates, demand shocks need not give rise to international externalities or coordination issues. Price shocks, however, do create an externality, and this is the focus of the empirical part of the paper. Using a simple 7 country model -- consisting of Canada, France, Germany, Italy,Japan, the United Kingdom, and the United States -- optimal cooperative and non-cooperative (Nash) policy rules to minimize the variance of output and inflation in each country are calculated. The cooperative policies are computed using standard dynamic stochastic programming techniques and the non-cooperative policies are computed using an algorithm developed by Finn Kydland. The central result is that the cooperative policy rules for these countries are more accommodative to inflation than the non-cooperative policy rules.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1506.

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Date of creation: Nov 1984
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Publication status: published as Taylor, John B. "International Coordination in the Design of Macroeconomic Policy Rules," European Economic Review, North Holland, Vol. 28, Nos. 1-2 ,(June-July 1985), pp. 53-81.
Handle: RePEc:nbr:nberwo:1506

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  1. Shubik, Martin, 2000. "Game theory models and methods in political economy," Handbook of Mathematical Economics, Elsevier, in: K. J. Arrow & M.D. Intriligator (ed.), Handbook of Mathematical Economics, edition 4, volume 1, chapter 7, pages 285-330 Elsevier.
  2. David H. Papell, 1983. "Activist Monetary Policy and Exchange Rate Overshooting: The Deutsche Mark/Dollar Rate," NBER Working Papers 1195, National Bureau of Economic Research, Inc.
  3. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, Econometric Society, vol. 48(5), pages 1305-11, July.
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Cited by:
  1. Matthew B. Canzoneri & Hali J. Edison, 1990. "A new interpretation of the coordination problem and its empirical significance," Proceedings, Board of Governors of the Federal Reserve System (U.S.), Board of Governors of the Federal Reserve System (U.S.), pages 399-435.
  2. John B. Taylor, 2007. "Globalization and Monetary Policy: Missions Impossible," NBER Chapters, in: International Dimensions of Monetary Policy, pages 609-624 National Bureau of Economic Research, Inc.
  3. John B. Taylor, 2013. "International Monetary Coordination and the Great Deviation," NBER Working Papers 18716, National Bureau of Economic Research, Inc.
  4. Mercado, P Ruben & Kendrick, David A & Amman, Hans, 1998. "Teaching Macroeconomics with GAMS," Computational Economics, Society for Computational Economics, Society for Computational Economics, vol. 12(2), pages 125-49, October.
  5. Peter Mooslechner & Martin Schuerz, 1999. "International Macroeconomic Policy Coordination: Any Lessons for EMU? A Selective Survey of the Literature," Empirica, Springer, Springer, vol. 26(3), pages 171-199, September.
  6. Weymark, Diana N, 1997. "Measuring the degree of exchange market intervention in a small open economy," Journal of International Money and Finance, Elsevier, Elsevier, vol. 16(1), pages 55-79, February.
  7. Stephen J. Turnovsky & Tamer Basar & Vasco d'Orey, 1987. "Dynamic Strategic Monetary Policies and Coordination in Interdependent Economies," NBER Working Papers 2467, National Bureau of Economic Research, Inc.
  8. Turnovsky, Stephen J., 1988. "The gains from fiscal cooperation in the two-commodity real trade model," Journal of International Economics, Elsevier, Elsevier, vol. 25(1-2), pages 111-127, August.
  9. John B. Taylor, 1990. "Policy Analysis With a Multicountry Model," NBER Working Papers 2881, National Bureau of Economic Research, Inc.
  10. van Tuijl, Martin A. & de Groof, Robert J. & Kolnaar, Ad H. J., 1997. "Fiscal policy and public capital in interdependent economics," Economic Modelling, Elsevier, Elsevier, vol. 14(2), pages 279-300, April.
  11. Tuijl, M.A. van & Groof, R.J. de & Kolnaar, A.H.J.J., 1997. "Fiscal policy and public capital in interdependent economies," Open Access publications from Tilburg University urn:nbn:nl:ui:12-73833, Tilburg University.
  12. McNelis, Paul D. & Asilis, Carlos M., 1995. "Monetary policy games with broad money targets a linear quadratic control analysis of the U.S. and Japan," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 19(5-7), pages 1091-1111.

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