Abstract

To date, no systematic study has yet examined whether economic interdependence is a structural determinant of international cooperation. Using a two-state monetary policy interaction model, I examine a cooperative equilibrium under a wide range of circumstances in which shifts occur in the level of interdependence as well as in the extent of relative gains concerns and the length of the shadow of the future. The analysis reveals that the level of interdependence influences each state's ability to pursue balancing behavior which prevents the other state from gaining a disproportionate advantage. In two-state interaction, the deleterious impact of relative gains on cooperation diminishes progressively under growing interdependence. The result refines liberal institutionalism by suggesting that cooperation is possible even if states' preferences contain relative gains concerns. Also, the result modifies Snidal's (1991a, 1991b) recent finding that the impact of relative gains attenuates in large- n interactions, while relative gains still impede cooperation in two-state PD cases. I show that a similar attenuation of the relative gain impact can arise in two-state interaction under high interdependence. The recent experiences of the Group of Seven (G-7) states support the liberal institutionalist hypothesis that there exists a positive relationship between the level of economic interdependence and the degree of monetary policy cooperation.

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