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International Monetary Coordination and the Great Deviation

  • John B. Taylor

Research in the early 1980s found that the gains from international coordination of monetary policy were quantitatively small compared to simply getting domestic policy right. That prediction turned out to be a pretty good description of monetary policy in the 1980s, 1990s, and until recently. Because this balanced international picture has largely disappeared, the 1980s view about monetary policy coordination needs to be reexamined. The source of the problem is not that the models or the theory are wrong. Rather there was a deviation from the rule-like monetary policies that worked well in the 1980s and 1990s, and this deviation helped break down the international monetary balance. There were similar deviations at many central banks, an apparent spillover culminating in a global great deviation. The purpose of this paper is to examine the possible causes and consequences of these spillovers, and to show that uncoordinated responses of central banks to the deviations can create an amplification mechanism which might be overcome by some form of policy coordination.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18716.

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Date of creation: Jan 2013
Date of revision:
Publication status: published as Taylor, John B., 2013. "International monetary coordination and the great deviation," Journal of Policy Modeling, Elsevier, vol. 35(3), pages 463-472.
Handle: RePEc:nbr:nberwo:18716
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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  1. John Taylor, 2007. "Housing and Monetary Policy," Discussion Papers 07-003, Stanford Institute for Economic Policy Research.
  2. Colin Gray, 2013. "Responding to a Monetary Superpower: Investigating the Behavioral Spillovers of U.S. Monetary Policy," Atlantic Economic Journal, International Atlantic Economic Society, vol. 41(2), pages 173-184, June.
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  6. Ahrend, Rudiger, 2008. "Monetary Ease: A Factor behind Financial Crises? Some Evidence from OECD Countries," Economics Discussion Papers 2008-44, Kiel Institute for the World Economy.
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  8. Michael D. Bordo & John Landon-Lane, 2013. "Does Expansionary Monetary Policy Cause Asset Price Booms; Some Historical and Empirical Evidence," NBER Working Papers 19585, National Bureau of Economic Research, Inc.
  9. anonymous, 2012. "Luncheon discussion: policymaking in an interconnected world," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 325-329.
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  12. Gilles Oudiz & Jeffrey Sachs, 1984. "Macroeconomic Policy Coordination among the Industrial Economies," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(1), pages 1-76.
  13. George A. Kahn, 2010. "Taylor rule deviations and financial imbalances," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 63-99.
  14. Claudio Borio & Piti Disyatat, 2011. "Global imbalances and the financial crisis: Link or no link?," BIS Working Papers 346, Bank for International Settlements.
  15. Boris Hofmann & Bilyana Bogdanova, 2012. "Taylor rules and monetary policy: a global "Great Deviation"?," BIS Quarterly Review, Bank for International Settlements, September.
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