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International Monetary Coordination and the Great Deviation

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  • John B. Taylor

    ()
    (Stanford University)

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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Bibliographic Info

Paper provided by Stanford Institute for Economic Policy Research in its series Discussion Papers with number 12-008.

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Date of creation: Jan 2013
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Handle: RePEc:sip:dpaper:12-008

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  1. John B. Taylor, 2007. "Housing and Monetary Policy," NBER Working Papers 13682, National Bureau of Economic Research, Inc.
  2. Cwik, Tobias & Mueller, Gernot & Schmidt, Sebastian & Wieland, Volker & Wolters, Maik H, 2012. "A New Comparative Approach to Macroeconomic Modeling and Policy Analysis," CEPR Discussion Papers 8814, C.E.P.R. Discussion Papers.
  3. Gilles Oudiz & Jeffrey Sachs, 1984. "Macroeconomic Policy Coordination among the Industrial Economies," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(1), pages 1-76.
  4. repec:fip:fedgsq:y:2010:x:4 is not listed on IDEAS
  5. Valentina Bruno & Hyun Song Shin, 2013. "Capital Flows and the Risk-Taking Channel of Monetary Policy," Working Papers 1469, Princeton University, Department of Economics, Center for Economic Policy Studies..
  6. anonymous, 2012. "Luncheon discussion: policymaking in an interconnected world," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 325-329.
  7. Colin Gray, 2013. "Responding to a Monetary Superpower: Investigating the Behavioral Spillovers of U.S. Monetary Policy," Atlantic Economic Journal, International Atlantic Economic Society, vol. 41(2), pages 173-184, June.
  8. Ahrend, Rudiger, 2010. "Monetary ease: A factor behind financial crises? Some evidence from OECD countries," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 4(12), pages 1-30.
  9. Maurice Obstfeld, 2012. "Does the Current Account Still Matter?," American Economic Review, American Economic Association, vol. 102(3), pages 1-23, May.
  10. Michael D. Bordo & John Landon-Lane, 2013. "Does Expansionary Monetary Policy Cause Asset Price Booms; Some Historical and Empirical Evidence," NBER Working Papers 19585, National Bureau of Economic Research, Inc.
  11. Boris Hofmann & Bilyana Bogdanova, 2012. "Taylor rules and monetary policy: a global "Great Deviation"?," BIS Quarterly Review, Bank for International Settlements, September.
  12. George A. Kahn, 2010. "Taylor rule deviations and financial imbalances," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 63-99.
  13. Jaime Caruana, 2012. "Luncheon address: policymaking in an interconnected world," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 313-324.
  14. John B. Taylor, 1984. "International Coordination in the Design of Macroeconomic Policy Rules," NBER Working Papers 1506, National Bureau of Economic Research, Inc.
  15. Claudio Borio & Piti Disyatat, 2011. "Global imbalances and the financial crisis: Link or no link?," BIS Working Papers 346, Bank for International Settlements.
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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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