Robust rules for G3 macroeconomic policy coordination

Abstract

The paper addresses the problem of designing cooperative policy rules for the G3 countries to cope with two forms of uncertainty. Exogenous uncertainty arises from shocks to oil prices and commodity prices, and endogenous uncertainty is modelled by the residuals of the econometric model GEM used for the design exercise. Employing state-space modelling techniques we obtain a Markov process to characterize endogenous uncertainty, and then use stochastic optimization methods to evaluate the optimal policies. Simple rules for fiscal and monetary policy are found for the G3 economies, with good robustness properties with respect to both endogenous and exogenous uncertainty.