International Model Building and Coordination of Economic Policies

Abstract

Publisher Summary This chapter describes the international model building and coordination of economic policies. The principal feature of economic policies within the United States in 1981 and 1982 is that they are uncoordinated. Fiscal policy was highly simulative, what with tax cuts and military spending lending to large budget deficits, while monetary policy was highly restrictive, leading to high interest rates. It is evident that when a country's performance is changed, its imports change, and this induces a change in its partner's exports that, in turn, induce an effect in the partner's level of activity. This feeds back on demand from the first country and sets a new chain of effects in motion. It is this interaction between countries that introduces added effects and puts more policy instruments for mutual coordination into the range of choice. The considerations generalize too many countries, simultaneously, in trading relationships. The sensitivity results are well known but they have not been systematically exploited for the purpose of international policy coordination, at least in quantitative form.