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International Policy Coordination in Dynamic Macroeconomic Models

  • Gilles Oudiz
  • Jeffrey Sachs
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    Recent analyses of the gains to policy coordination have focussed on the strategic aspects of macroeconomic policy making in a static setting. A major theme is that noncooperative policy making is likely to be Pareto inefficient because of the presence of beggar-thy-neighbor policies. This paper extends the analysis to a dynamic setting, thereby introducing three important points of realism to the static game. First, the payoffs to beggar-thy-neighbor policies look very different in one-period and multiperiod games, and thus so do the gains to coordination. Second, we show that policy coordination may reduce economic welfare if governments are nyopic in their policy making, as is sometimes claimed. Third, governments act under a fundamental constraint that they cannot bind the actions of later governments, and we investigate how this constraint alters the gains to policy coordination.

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    File URL: http://www.nber.org/papers/w1417.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1417.

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    Date of creation: Aug 1984
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    Publication status: published as Oudiz, Gilles and Jeffrey Sachs. "Macroeconomic Policy Coordination Among The Industrial Economies," Brookings Papers, 1984, v15(1), 1-64.
    Handle: RePEc:nbr:nberwo:1417
    Note: ITI IFM
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    1. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
    2. Willem H. Buiter & Marcus H. Miller, 1982. "Real Exchange Rate Overshooting and the Output Cost of Bringing Down Inflation," NBER Working Papers 0749, National Bureau of Economic Research, Inc.
    3. David Lipton & James M. Poterba & Jeffrey Sachs & Lawrence H. Summers, 1983. "Multiple Shooting in Rational Expectations Models," NBER Technical Working Papers 0003, National Bureau of Economic Research, Inc.
    4. Kydland, Finn, 1975. "Noncooperative and Dominant Player Solutions in Discrete Dynamic Games," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 16(2), pages 321-35, June.
    5. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
    6. Kydland, Finn, 1977. "Equilibrium solutions in dynamic dominant-player models," Journal of Economic Theory, Elsevier, vol. 15(2), pages 307-324, August.
    7. Jeffrey Sachs, 1983. "International Policy Coordination in a Dynamic Macroeconomic Model," NBER Working Papers 1166, National Bureau of Economic Research, Inc.
    8. Kenneth S. Rogoff, 1983. "Productive and counterproductive cooperative monetary policies," International Finance Discussion Papers 233, Board of Governors of the Federal Reserve System (U.S.).
    9. Willem H. Buiter, 1983. "Optimal and Time-Consistent Polices in Continuous Time Rational Expectations Models," NBER Technical Working Papers 0029, National Bureau of Economic Research, Inc.
    10. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
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