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International Monetary Coordination and the Great Deviation

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  • John B. Taylor

Abstract

Research in the early 1980s found that the gains from international coordination of monetary policy were quantitatively small compared to simply getting domestic policy right. That prediction turned out to be a pretty good description of monetary policy in the 1980s, 1990s, and until recently. Because this balanced international picture has largely disappeared, the 1980s view about monetary policy coordination needs to be reexamined. The source of the problem is not that the models or the theory are wrong. Rather there was a deviation from the rule-like monetary policies that worked well in the 1980s and 1990s, and this deviation helped break down the international monetary balance. There were similar deviations at many central banks, an apparent spillover culminating in a global great deviation. The purpose of this paper is to examine the possible causes and consequences of these spillovers, and to show that uncoordinated responses of central banks to the deviations can create an amplification mechanism which might be overcome by some form of policy coordination.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18716.

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Date of creation: Jan 2013
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Publication status: published as Taylor, John B., 2013. "International monetary coordination and the great deviation," Journal of Policy Modeling, Elsevier, vol. 35(3), pages 463-472.
Handle: RePEc:nbr:nberwo:18716

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  1. Taylor, John B., 1985. "International coordination in the design of macroeconomic policy rules," European Economic Review, Elsevier, Elsevier, vol. 28(1-2), pages 53-81.
  2. Michael D. Bordo & John Landon-Lane, 2013. "Does expansionary monetary policy cause asset price booms? some historical and empirical evidence," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, Central Bank of Chile, vol. 16(2), pages 04-52, August.
  3. John B. Taylor, 2007. "Housing and Monetary Policy," NBER Working Papers 13682, National Bureau of Economic Research, Inc.
  4. repec:fip:fedgsq:y:2010:x:4 is not listed on IDEAS
  5. Maurice Obstfeld, 2012. "Does the Current Account Still Matter?," NBER Working Papers 17877, National Bureau of Economic Research, Inc.
  6. Claudio Borio & Piti Disyatat, 2011. "Global imbalances and the financial crisis: Link or no link?," BIS Working Papers 346, Bank for International Settlements.
  7. George A. Kahn, 2010. "Taylor rule deviations and financial imbalances," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 63-99.
  8. Valentina Bruno & Hyun Song Shin, 2012. "Capital Flows and the Risk-Taking Channel of Monetary Policy," BIS Working Papers 400, Bank for International Settlements.
  9. Boris Hofmann & Bilyana Bogdanova, 2012. "Taylor rules and monetary policy: a global "Great Deviation"?," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, September.
  10. Wieland, Volker & Cwik, Tobias & Müller, Gernot J. & Schmidt, Sebastian & Wolters, Maik Hendrik, 2012. "A new comparative approach to macroeconomic modeling and policy analysis," IMFS Working Paper Series 49, Institute for Monetary and Financial Stability (IMFS), Goethe University Frankfurt.
  11. Ahrend, Rudiger, 2008. "Monetary Ease: A Factor behind Financial Crises? Some Evidence from OECD Countries," Economics Discussion Papers 2008-44, Kiel Institute for the World Economy.
  12. Colin Gray, 2013. "Responding to a Monetary Superpower: Investigating the Behavioral Spillovers of U.S. Monetary Policy," Atlantic Economic Journal, International Atlantic Economic Society, International Atlantic Economic Society, vol. 41(2), pages 173-184, June.
  13. Jaime Caruana, 2012. "Luncheon address: policymaking in an interconnected world," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 313-324.
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  15. anonymous, 2012. "Luncheon discussion: policymaking in an interconnected world," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 325-329.
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Cited by:
  1. Jürgen Matthes & Horst Löchel & Uwe Vollmer & Oliver Landmann, 2013. "Führt die Geldpolitik der japanischen Zentralbank zu einem Währungskrieg?," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 66(10), pages 03-18, 05.
  2. Muneesh Kapur & Rakesh Mohan, 2014. "India’s Recent Macroeconomic Performance: An Assessment and Way Forward," IMF Working Papers 14/68, International Monetary Fund.

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