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The Utopia of Implementing Monetary Policy Cooperation through Domestic Institutions

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In a wide variety of international macro models monetary policy cooperation is optimal, non-cooperative policies are inefficient, but optimal policies can be attained noncooperatively by optimal design of domestic institutions. We show that given endogenous instititional design, inefficiencies of noncooperation cannot and will not be eliminated. Credible contracts are introduced as the contracts that would be chosen by the governments based on their individual rationality. These will be inefficient when compared to the optimal ones. Implementation of the latter implicity embeds an assumption about cooperation at the delegation stage, which is inconsistent with the advocated non-cooperative nature of the solution. A general solution method for credible contracts and an example from international monetary policy cooperation are considered. Our results could explain some inefficiencies of existing delegation schemes and hint to a stronger coordinating role for supranational authorities in international policy coordination.

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File URL: http://www.nuffield.ox.ac.uk/economics/papers/2005/w13/MPcooputopia.pdf
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Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2005-W13.

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Length: 17 pages
Date of creation: 10 Mar 2005
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Handle: RePEc:nuf:econwp:0513

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Web page: http://www.nuff.ox.ac.uk/economics/

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  12. Matthew B. Canzoneri & Dale W. Henderson, 1991. "Monetary Policy in Interdependent Economies: A Game-Theoretic Approach," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031787, December.
  13. Hamada, Koichi, 1976. "A Strategic Analysis of Monetary Interdependence," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 677-700, August.
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