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Currency Wars or Efficient Spillovers? A General Theory of International Policy Cooperation

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  • Anton Korinek

Abstract

In an interconnected world, national economic policies regularly lead to large international spillover effects, which frequently trigger calls for international policy cooperation. However, the premise of successful cooperation is that there is a Pareto inefficiency, i.e. if there is scope to make some nations better off without hurting others. This paper presents a first welfare theorem for open economies that defines an efficient benchmark and spells out the conditions that need to be violated to generate inefficiency and scope for cooperation. These are: (i) policymakers act competitively in the international market, (ii) policymakers have sufficient external policy instruments and (iii) international markets are free of imperfections. Our theorem holds even if each economy suffers from a wide range of domestic market imperfections and targeting problems. We provide examples of current account intervention, monetary policy, fiscal policy, macroprudential policy/capital controls, and exchange rate management and show that the resulting spillovers are Pareto efficient, as long as the three conditions are satisfied. Furthermore, we develop general guidelines for how policy cooperation can improve welfare when the conditions are violated.

Suggested Citation

  • Anton Korinek, 2017. "Currency Wars or Efficient Spillovers? A General Theory of International Policy Cooperation," IMF Working Papers 17/25, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:17/25
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    References listed on IDEAS

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    1. Emmanuel Farhi & Iván Werning, 2016. "A Theory of Macroprudential Policies in the Presence of Nominal Rigidities," Econometrica, Econometric Society, vol. 84, pages 1645-1704, September.
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    Citations

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    Cited by:

    1. Choi, Woo Jin & Taylor, Alan M., 2017. "Precaution Versus Mercantilism: Reserve Accumulation, Capital Controls, and the Real Exchange Rate," CEPR Discussion Papers 11963, C.E.P.R. Discussion Papers.
    2. repec:wsi:jicepx:v:08:y:2017:i:03:n:s179399331750017x is not listed on IDEAS
    3. Martin Richardson & Frank Stähler, 2017. "International Agreements, Economic Sovereignty and Exit," ANU Working Papers in Economics and Econometrics 2017-657, Australian National University, College of Business and Economics, School of Economics.
    4. Gurnain Kaur Pasricha, 2017. "Policy Rules for Capital Controls," BIS Working Papers 670, Bank for International Settlements.
    5. Jeffrey R. Campbell, 2014. "Quantitative Easing in Joseph's Egypt with Keynesian Producers," Working Paper Series WP-2014-15, Federal Reserve Bank of Chicago, revised 05 Nov 2014.
    6. repec:eee:inecon:v:111:y:2018:i:c:p:61-80 is not listed on IDEAS
    7. Luciano Andreozzi & Roberto Tamborini, 2017. "We need more Europe in the Monetary Union. Which Europe? Hints from policy games," EconPol Working Paper 5, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    8. repec:bis:bisbpc:94-05 is not listed on IDEAS
    9. Korinek, Anton, 2018. "Regulating capital flows to emerging markets: An externality view," Journal of International Economics, Elsevier, vol. 111(C), pages 61-80.

    More about this item

    Keywords

    Capital controls; Current account; Exchange rate management; Fiscal policy; Intervention; Monetary policy; Spillovers; Macroprudential Policy; Economic theory; General equilibrium models; Open economies; first welfare theorem; international policy cooperation; currency wars; International Lending and Debt Problems; Open Economy Macroeconomics;

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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