On the Gains from International Macroeconomic Policy Coordination

Abstract

We consider the question whether coordinated macroeconomic policy reactions to a negative productivity shock give better results than non-coordinated policies and passive adaptations to a shock. The framework used is the McKibbin-Sachs Global Model of the world economy, which incorporates rational expectations. The USA, Japan and Germany are regarded as players in a dynamic game, using money supplies as strategic variables. It is shown that cooperative policies give results that are slightly superior to non-cooperative Nash equilibrium solutions. On the other hand, both cooperative and non-cooperative policies give distinctly better results than policies that do not react actively upon the productivity shock.