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International Policy Coordination in Interdependent Monetary Economies

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  • van der Ploeg, Frederick

Abstract

A classical equilibrium model is analysed of two interdependent monetary economies in which it is assumed that cash is the only asset, and which is characterized by perfect foresight, flexible exchange rates and imperfect substitution between home and foreign goods. The first-best optimum sets the marginal rate of substitution between private and public goods to unity and leads to no tax distortions and the optimal quantity of money. Both non-cooperative and cooperative market-oriented outcomes are time-inconsistent, since each government has an incentive to renege and levy a surprise inflation tax. International policy coordination without precommitment can be counterproductive even though there are no tax distortions and the provision of public goods is optimal, since it exacerbates the credibility problems perceived by the private sectors and therefore leads to excessive inflation and too low a level of real money balances. The reason is that a unilateral surprise inflation tax induces a real depreciation and leads to inflation costs, but a multilateral expansion of monetary growth does not. The typical ranking in order of decreasing welfare is first-best optimum, cooperation with precommitment, competition with precommitment, competition without precommitment and coordination without precommitment.

Suggested Citation

  • van der Ploeg, Frederick, 1987. "International Policy Coordination in Interdependent Monetary Economies," CEPR Discussion Papers 169, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:169
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    Cited by:

    1. Andersen, Torben M., 2006. "The public sector and international integration," Economics Letters, Elsevier, vol. 93(2), pages 202-209, November.
    2. Torben M. Andersen & Allan Sørensen, 2013. "Product market integration, tax distortions and public sector size," Economics Working Papers 2013-28, Department of Economics and Business Economics, Aarhus University.
    3. Hassan Molana & Catia Montagna & Chang Yee Kwan, 2012. "Subsidies As Optimal Fiscal Stimuli," Bulletin of Economic Research, Wiley Blackwell, vol. 64(Supplemen), pages 149-167, December.
    4. Tabellini, Guido, 1990. "Domestic politics and the international coordination of fiscal policies," Journal of International Economics, Elsevier, vol. 28(3-4), pages 245-265, May.
    5. Torben Andersen, 2001. "European Integration - A Downward Bias in Employment Policies?," CESifo Working Paper Series 574, CESifo Group Munich.
    6. Assaf Razin & Efraim Sadka, 1991. "International Fiscal Policy Coordination and Competition: An Exposition," NBER Working Papers 3779, National Bureau of Economic Research, Inc.
    7. Patrick J. Kehoe, 1986. "International policy cooperation may be undesirable," Staff Report 103, Federal Reserve Bank of Minneapolis.
    8. Torben Andersen & Allan Sørensen, 2007. "Product Market Integration and Income Taxation: Distortions and Gains from Trade," CESifo Working Paper Series 2170, CESifo Group Munich.
    9. Van Der Ploeg, F., 1990. "Budgetary Aspects Of Economic And Monetary Integration Inn Europe," Papers 9037, Tilburg - Center for Economic Research.
    10. Peter Mooslechner & Martin Schuerz, 1999. "International Macroeconomic Policy Coordination: Any Lessons for EMU? A Selective Survey of the Literature," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 26(3), pages 171-199, September.
    11. Henrik Jensen, 1993. "International monetary policy cooperation in economies with centralized wage setting," Open Economies Review, Springer, vol. 4(3), pages 269-285, September.
    12. van der Ploeg, Frederick, 1989. "Fiscal Aspects of Monetary Integration in Europe," CEPR Discussion Papers 340, C.E.P.R. Discussion Papers.
    13. Torben M. Andersen & Allan Sørensen, 2012. "Globalization, Tax Distortions, and Public-Sector Retrenchment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(2), pages 409-439, June.
    14. Jensen, Henrik, 1996. "The advantage of international fiscal cooperation under alternative monetary regimes," European Journal of Political Economy, Elsevier, vol. 12(3), pages 485-504, November.
    15. Huizinga, Harry & Nielsen, Søren Bo, 2005. "Capital Income Tax Coordination and the Income Tax Mix," Working Papers 24-2005, Copenhagen Business School, Department of Economics.
    16. Andersen, Torben M. & Spange, Morten, 2006. "International interdependencies in fiscal stabilization policies," European Economic Review, Elsevier, vol. 50(5), pages 1169-1195, July.
    17. Var Der Ploeg, F., 1989. "Monetary Interdependence Under Alternative Exchange-Rate Regime," Papers 8920, Tilburg - Center for Economic Research.
    18. Patrick Artus, 1992. "Passage à l'union économique et monétaire en Europe : effets sur la croissance et les politiques budgétaires," Économie et Prévision, Programme National Persée, vol. 106(5), pages 123-137.
    19. Andersen, Torben M. & Rasmussen, Bo Sandemann & Sorensen, Jan Rose, 1996. "Optimal fiscal policy in open economies with labour market distortions," Journal of Public Economics, Elsevier, vol. 63(1), pages 103-117, December.

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