Recent analyses of the gains to policy coordination have focussed on the strategic aspects of macroeconomic policymaking 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.
Industrial Economies THE TURBULENT EVENTS in the world economy since 1973 have several times prompted the call for the major countries in the Organization for Economic Cooperation and Development (OECD) to coordinate their macroeconomic policies.I In the immediate aftermath of the 1973 oil We would like to thank Peter Hooper of the Board of Governors of the Federal Reserve System, Stephen Marris and John Williamson of the Institute for International Economics, and members of the Brookings Panel for helpful discussions. Data Resources, Inc., generously made available computer facilities for this study. The paper was written while Gilles Oudiz was a visiting scholar at the Massachusetts Institute of Technology, and he gratefully acknowledges the financial support of the North Atlantic Treaty Organization and the Fulbright fellowship program during this visit. 1. For useful discussions of the policy coordination debate in the context of the economic summit meetings, see George de Menil and Anthony M.
International Policy Coordination in a DynamicMacroeconomic Model ABS TRACT This paper illustrates the role for macroeconomic policy coordination when interdependent economies are pursuing disinflationary policies. Under flexible exchange rates, policy makers have an incentive to reduce inflation by pursuing contractionary policies that yield a currency appreciation. In a Nash, perfect foresight equilibrium, policy authorities in the model pursue contractionary policies to achieve currency appreciation, but these attempts cancel out, with the result that all countries end up pursuing excessively contractionary policies (relative to a symmetric Pareto optimum). The paper presents these results in a two-country, infinite-horizon difference game.
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