The Economics of International Policy Coordination

Since the breakdown of the Bretton-Woods system in the early 1970’s, the debate about coordinating the macroeconomic policies of the major countries in the world economy has intensified. There is a perception that the current “non-system” has lead to macroeconomic policies in major countries which are counter-productive for the world as a whole. Indeed the question of reforming the world monetary system is a question of designing a set of “rules of the game” within which countries can persue their own national objectives and yet which still leads to some form of global coordination of macroeconomic policies. The issue of strategic interactions between countries has recently received some analytical insights with the application of game theory to the economics literature on interdependence between countries. The purpose of this paper is to survey these recent applications of static and dynamic game theory to the question of international policy coordination. It also surveys the results of the few empirical attempts to measure the potential gains to coordination.