International Policy Coordination with a Dominant Player — The Cases of the United States, Japan, Taiwan, and Korea

This chapter extends the two-country policy coordination model discussed in Chapter 7 to a multicountry model. Consequently, this model is much more complicated. Mathematical derivations are collected in the appendix. Similar to Chapter 7, using a simple asymmetric Mundell–Fleming–Dornbusch static model, this chapter first estimates the parameters of the model with the least squares method, using the data from 1975 to 1990. The results are then utilized to simulate the model. Our results show that, when the United States (or Japan) acts as the dominant player (the Stackelberg leader) by anticipating Taiwan’s (or Korea’s) reaction functions, the gain from policy coordination is the same as that of the Nash equilibrium. Based on quadratic social welfare function, we show that the small countries lose slightly by cooperating with the large countries, and the large countries are almost indifferent about cooperation or non-cooperation with the small countries. The result is similar to Chapter 7, and it seems to confirm that we return to a neoclassical world of free competition, as cooperation is a type of interference of market mechanism. This probably explains why the active policy coordination only has a limited success among the developed countries, and to our knowledge, has not yet taken place among the developed and developing countries.