Gains From International Macroeconomic Policy Coordination in an Interdependent World

Abstract

Advantages arising from international macroeconomic policy coordination versus non-cooperative policies and policy layouts without active macroeconomic policy optimization are evaluated. The framework for the simulation experiments is the McKibbin-Sachs Global Model, incorporating rational expectations. The welfare losses caused by a temporary productivity shock are calculated and compared under the alternative policy regimes. The USA, Japan and Germany are players in a dynamic game. Active monetary policy leads to advantages from optimization and to further gains from coordination. On the other hand, simulation results from fiscal policy scenarios suggest that the Nash solution may be inefficient and lead to higher over-all welfare losses compared to the fixed policy scenarios.