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International Macroeconomic Policy Coordination When Policy-Makers Disagree on the Model

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  • Jeffrey A. Frankel and Katharine E. Rockett.

Abstract

The existing literature on international macroeconomic policy coordination makes the unrealistic assumption that policy-makers all know the true model, from which it follows in general that the Nash bargaining solution is superior to the Nash non-cooperative solution. But everything changes once we recognize that policy-makers' models differ from each other and therefore from the "true" model. It is still true that the two countries will in general be able to agree on a cooperative policy package that each believes will improve the objective function relative to the Nash non-cooperative solution. However, the bargaining solution is as likely to move the target variables in the wrong direction as in the right direction, in the light of a third true model. This paper illustrates these theoretical points with monetary and fiscal multipliers taken from simulations of eight leading international econometric models. (It is a sequel to NBER Working Paper 1925, which considered coordination between the domestic monetary and fiscal authorities.) Here we first consider coordination between U.S. and non-U.S. central banks. We find that out of 512 possible combinations of models that could represent U.S. beliefs, non-U.S. beliefs and the true model, coordination improves U.S. welfare in only 289 cases, reducing it in 206, and improves the welfare of other OECD countries in only 297 cases, reducing it in 198. Then we consider coordination with both monetary and fiscal policy. We find that out of 512 combinations, coordination improves U.S. welfare in 183 cases, reducing it in 228, and improves the welfare of other OECD countries in 283 cases, reducing it in 219. A final section of the paper considers possible extensions of the framework, dealing with uncertainty.

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Bibliographic Info

Paper provided by University of California at Berkeley in its series Economics Working Papers with number 8744.

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Date of creation: 01 Jul 1987
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Handle: RePEc:ucb:calbwp:8744

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References

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  1. Buiter,Willem H. & Marston,Richard C., 1986. "International Economic Policy Coordination," Cambridge Books, Cambridge University Press, number 9780521337809, October.
  2. Frankel, Jeffrey A., 1987. "The Sources of Disagreement Among International Macro Models, and Implications for Policy Coordination," Department of Economics, Working Paper Series qt2fd768nz, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  3. Cooper, Richard N., 1985. "Economic interdependence and coordination of economic policies," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 23, pages 1195-1234 Elsevier.
  4. Miller, Marcus & Salmon, Mark, 1984. "Dynamic Games and the Time Inconsistency of Optimal Policy in Open Economies," CEPR Discussion Papers 27, C.E.P.R. Discussion Papers.
  5. Canzoneri, Matthew B & Gray, Jo Anna, 1985. "Monetary Policy Games and the Consequences of Non-cooperative Behavior," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(3), pages 547-64, October.
  6. William H. Branson, 1986. "The Limits of Monetary Coordination As Exchange Rate Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(1), pages 175-194.
  7. Patrick J. Kehoe, 1986. "International policy cooperation may be undesirable," Staff Report 103, Federal Reserve Bank of Minneapolis.
  8. Hamada, Koichi, 1976. "A Strategic Analysis of Monetary Interdependence," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 677-700, August.
  9. Ishii, Naoko & McKibbin, Warwick & Sachs, Jeffrey, 1985. "The economic policy mix, policy cooperation, and protectionism: Some aspects of macroeconomic interdependence among the United States, Japan, and other OECD countries," Journal of Policy Modeling, Elsevier, vol. 7(4), pages 533-572.
  10. Rogoff, Kenneth, 1985. "Can international monetary policy cooperation be counterproductive?," Journal of International Economics, Elsevier, vol. 18(3-4), pages 199-217, May.
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Cited by:
  1. Matthew B. Canzoneri & Hali J. Edison, 1989. "A new interpretation of the coordination problem and its empirical significance," International Finance Discussion Papers 340, Board of Governors of the Federal Reserve System (U.S.).
  2. Barry Eichengreen, 1993. "The Endogeneity of Exchange Rate Regimes," NBER Working Papers 4361, National Bureau of Economic Research, Inc.

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