International Coordination

Abstract

After a 30-year absence, calls for international coordination of macroeconomic policy are back. This time the issues go by names like currency wars, taper tantrums, and fiscal compacts. In traditional game theory terms, the existence of spillovers implies that countries are potentially better off if they coordinate policies than under the Nash non-cooperative equilibrium. But what is the nature of the spillover and the coordination? The paper interprets recent macroeconomic history in terms of four possible frameworks for proposals to coordinate fiscal policy or monetary policy: the locomotive game, the discipline game, the competitive depreciation game and the competitive appreciation game. (The paper also considers claims that monetary coordination has been made necessary by the zero lower bound among advanced countries or financial imperfections among emerging markets.) Perceptions of the sign of spillovers and the direction of proposed coordination vary widely. The existence of different models and different domestic interests may be as important as the difference between cooperative and non-cooperative equilibria. In some cases complaints about foreigners' actions and calls for cooperation may obscure the need to settle domestic disagreements.

Policy Coordination Under Model Disagreement and Uncertainty

“…Our results show that the incentive to cooperate shrinks as soon as countries have different views about how their economies function and whether particular policies have a positive or negative on their own output and that of the other country. As Eichengreen (2013), Frankel (2016) and Ostry and Ghosh (2016) explain, it is therefore not surprising that macroeconomic cooperation has not really worked well. Despite attempts to coordinate monetary and fiscal policies as well as exchange rate policies in the G7, there are very few cases where this has functioned well.…”

“…While leading countries managed to agree on fiscal stimulus at the Bonn Summit in 1978 and on exchange rate levels at the following Plaza Accord (1985) and Louvre Agreement (1987), cooperation proved more difficult afterwards as Germany and Japan came to regret what they agreed to. As Frankel (2016) explains, this was not only driven by material interests that were different, but also by different world views where some countries believed they played the locomotive game with positive spillovers, and Germany believed to be playing the moral hazard game with negative spillovers. The same difference in perceptions might have been the reason why countries could agree on fiscal stimulus in the G-20 at the London summit in 2009 but European countries failed to reach such in agreement in the Euro crisis little time later.…”

“…The discussion in the European Union about the adequate policy mix of monetary and fiscal policy serves as a second example. As Frankel (2016) argues, countries might take the view that expansive fiscal and monetary policy serve as a "locomotive" that pulls also other countries ahead, or take the "moral hazard" view according to which expansive policy has negative effects in terms of inflation or the need to bail-out fiscally insolvent states. While Germany believes in the virtues of a restrictive fiscal and monetary policy, France and others take a different position.…”

Twenty years of the G20: Has it changed global economic governance?

“…The IMF staff's more recent views on the benefits of policy coordination can be found in Gaspar et al (2016). Frankel (2015) and Eichengreen (2013) are illuminating on the practical limits to cross-national policy coordination. Frankel noted that different models of how the economy works can lead to very different conclusions on what constitutes good policy.…”

Currency depreciation and the monetary adjustment process: reconsidering Lord King’s contributions

“…Its proponents argue that when some large countries, e.g., the U.S., deviate from good policy, the sizable effects on international variables induce other countries to deviate, resulting in multiple and excessively volatile global equilibria characterized by suboptimal capital and trade flows and exchangerate movements (Bullard and Singh, 2008;Taylor, 2013a;Bullard, 2014). It is now increasingly recognized that the current international monetary system facilitates and amplifies monetary spillovers, financial cycles and currency wars which impact domestic variables and policy choices (Frankel, 2015;Rey, 2015;Saccomanni, 2015), and that in this case the gains from international coordination may be very large.…”