International Macroeconomic Policy Coordination Research Articles

Cross-Country Connectedness in Inflation and Unemployment: Measurement and Macroeconomic Consequences

We bring the notion of connectedness (Diebold and Yilmaz, 2012) to a set of two critical macroeconomic variables as inflation and unemployment. We focus on the G7 economies plus Spain, and use monthly data –high-frequency data in a macro setting– to explore the extent and consequences of total and directional volatility spillovers across variables and countries. We find that total connectedness is larger for prices (58.28%) than for unemployment (41.81%). We also identify asymmetries per country that result in higher short-run Phillips curve trade-offs in recessions and lower trade-offs in expansions. Besides, by exploring time-varying connectedness (resulting from country-specific shocks), we find that volatility spillovers magnify in periods of common economic turmoil such as the Global Financial Crisis. Our results call for an enhancement of international macroeconomic policy coordination.

International Financial Crisis: Expectation Transmission and Policy Synchronisation

In recent years, the economic and financial linkages of major economies have become intertwined, and the cross-market contagion effect of the global financial crisis has become more apparent. This paper mainly studies the expectation transmission and policy synchronisation in international financial crisis, netting out influence of fundamental-based factors. Contributions of this paper are two folds. First, we innovatively calculate and utilize expectation gap and policy gap. We apply Taylor Rule regression to different expectation and monetary policy stance variables, and uses respective residuals as expectation gap and policy gap. We measure expectation transmission and policy synchronisation by correlation of expectation gap/policy gap between originating economy and affected economies. Second, we innovatively propose financial accelerator in open economy and Taylor Rule augmented by international factors as respective theoretical basis of expectation transmission and policy synchronisation. Our empirical study covers four international financial crises and 24 economies, and finds that expectation transmission and policy synchronisation are generally significant in the four crises. Transmission efficiency varies because of financial openness, financial stability and regional integration. Economic weight of the originating economy also exerts influences. These results convincingly support the theoretical analysis in this paper. Based on above results, this paper proposes relevant policy recommendations, such as to strengthen expectation management, to strike balance between domestic and international equilibrium, and to strengthen international macroeconomic policy coordination.

Is Employment Globalizing?

We investigate the claim that national labor markets have become more globally interconnected in recent decades. We do so by deriving estimates over time of three different notions of interconnection: (i) the share of labor demand that is export induced (i.e., all labor demand created by foreign entities buying products exported by the home country)—we provide estimates for 40 countries; (ii) the share of workers employed in sectors producing tradable goods or services—68 countries; and (iii) the ratio of the number of jobs that are either located in a tradable sector, or that are involved in producing services that are required by these tradable sectors, to all jobs in the economy, which we call the trade-linked employment share—40 countries. Our estimates lead to the conclusion that the evidence of a large increase in the interconnections between national labor markets is far weaker than commonly asserted: levels of inter-connectivity, and the direction of changes over time, vary across notions of interconnection and countries. The main reasons for this are labor-displacing productivity growth in tradable sectors of each economy and the diminishing fraction of national labor forces hired into manufacturing jobs worldwide. We also discuss the implications of our results for different policy debates that each of the three measures is associated with: international coordination of macroeconomic policies (export-induced labor demand), currency devaluations (share of workers producing tradables), and education and labor protection (trade-linked share).

Twin deficits and fiscal spillovers in the EMU's periphery. A Keynesian perspective

The objective of this paper is to shed light on the twin deficit hypothesis in Southern Europe and the MENA region, taking into account fiscal spillovers from the core during the global crisis. Using Godley and Lavoie (2007)'s baseline model, we first show that fiscal shocks from a core region could aggravate macroeconomic imbalances in the periphery. We then gather data from the period 1977–2016 for ten MENA and peripheral EMU countries, and model the twin deficit hypothesis in the presence of fiscal spillover with a P-VARX methodology. Our results highlight that fiscal balance, current account, and GDP growth rates in the EMU's periphery are negatively affected by fiscal consolidations in the core. Fiscal discipline in surplus countries is tantamount to a ‘beggar thy neighbor’ effect on the periphery, in times of crisis. We discuss the implications of our results to propose further international coordination of macroeconomic policies.

Bringing Balance to the Force? A Comparative Analysis of Institutionalisation Processes in the G20’s Mutual Assessment Process and the EU’s Macroeconomic Imbalances Procedure

ABSTRACTEvents from 2008 onwards have bought the old consensus on the sound money and finance paradigm (the ‘Great Moderation’) into bold relief. One manifestation of this crisis of belief is the increased focus on global imbalances, institutionally reflected in the creation of the Mutual Assessment Process (MAP) at the G20 level and subsequently the Macroeconomic Imbalances Procedure (MIP) at the European Union (EU) level. Comparing both newcomers to international macroeconomic policy coordination, this article analyses four features that shape (and we show, institutionalise) the process of paradigm contestation: presence, position, promotion and plausibility. We argue that although initially the G20’s MAP scored higher in terms of presence, position and promotion, it is the EU’s MIP, which heralds a more substantial shift in macroeconomic management. Collectively, both indicate the increased prominence of global imbalances as the subject of inter- or supranational management, and a broadening of the notion of necessary or legitimate economic governance.

A Note on the International Coordination of Antidoping Policies

We apply ideas put forward in the literature on the international coordination of macroeconomic and trade policies to study the merits of an international coordination of antidoping policies. Without international coordination of antidoping policies, sports associations and National Antidoping Agencies that comply with an international regulatory framework like the World Antidoping Code are at a disadvantage. We sketch a simple game-theoretic model to illustrate this disadvantage, and the advantage of an international coordination of antidoping policies. Finally, we address the limitations of our model and how it could be extended in future research.

International macroeconomic policy coordination: an overview

This article, which serves as an introduction to the Oxford Review of Economic Policy’s issue on ‘Macroeconomic Policy Coordination: Global Imbalances and Global Growth’, charts the evolution of international macroeconomic policy coordination from the end of the Second World War until the present day. The arrangements laid out at the Bretton Woods Conference in 1944 provide an intellectual framework with which to assess the evolving need for and feasibility of international coordination across three historical periods: the ‘fixed-but-adjustable’ exchange-rate arrangements of the Bretton Woods system; the subsequent flexible exchanges period of the ‘non-system’ which led into the Great Moderation; and finally the period since the global financial crisis of 2008. Increased economic integration, particularly through the capital account, combined with asymmetries in exchange-rate regimes between China and the US, have shown that reliance on the automatic adjustment mechanisms of the non-system are no longer feasible, so that a return to policy cooperation is necessary in order to rebalance the world economy and reduce the adverse spill-over impacts that uncoordinated rebalancing would entail. The article explores the nature of this coordination and provides a context for other contributions to the issue, analysing positive and normative aspects of macroeconomic policy coordination from a global perspective and from the prospective of key global players including China and the European Union.

International Coordination of Macroeconomic Policies: Still Alive in the New Millennium?

In this paper we provide two building blocks for an analysis of international policy coordination: (1) a survey of models of policy coordination, and (2) an account of experience with policy coordination among the G-7 countries and within Europe since the breakdown of the Bretton Woods System. Using these building blocks, we investigate the correspondence between the models and experience and attempt to draw lessons for both the modelers and the practitioners. We find that the correspondence is close enough that the models help in analyzing several instances of actual policy coordination, but that the correspondence could be even closer. As for lessons for modelers, we suggest that they devote more attention to the analysis of information exchange, a key feature of practical policy coordination; to the coordination of different types of policies; to the ramifications of political divisions within countries; and to the implications of market irrationality and speculative bubbles. As for lessons for policy makers, we suggest that they give more consideration to the choice of their ultimate objectives, in particular to whether the current account should always be close to balance; to achieving better internal policies; and to the greater use of fiscal policy as a stabilization tool.

International Coordination of Macroeconomic Policies: Still Alive in the New Millennium?

In this paper we provide two building blocks for an analysis of international policy coordination: (1) a survey of models of policy coordination, and (2) an account of experience with policy coordination among the G-7 countries and within Europe since the breakdown of the Bretton Woods System. Using these building blocks, we investigate the correspondence between the models and experience and attempt to draw lessons for both the modelers and the practitioners. We find that the correspondence is close enough that the models help in analyzing several instances of actual policy coordination, but that the correspondence could be even closer. As for lessons for modelers, we suggest that they devote more attention to the analysis of information exchange, a key feature of practical policy coordination; to the coordination of different types of policies; to the ramifications of political divisions within countries; and to the implications of market irrationality and speculative bubbles. As for lessons for policy makers, we suggest that they give more consideration to the choice of their ultimate objectives, in particular to whether the current account should always be close to balance; to achieving better internal policies; and to the greater use of fiscal policy as a stabilization tool.

Challenges for Economic Policy Coordination within European Monetary Union

The Coordination of National Stabilization Policies: Evolution of National Policies and International Institutions R.C. Bryant. International Monetary Policy Coordination T. Persson, G. Tabellini. Policy Making in an Integrated World: From Surveillance to...? B. Eichengreen. International Macroeconomic Policy Coordination: Any Lessons for EMU? A Selective Survey of the Literature P. Mooslechner, M. Schurz. The Euro and Internal Economic Policy Coordination A. Italianer. Can the ECB be Truly Independent? Should it be? M. Demertzis, et al. The Stability and Growth Pact: A Delicate Balance or an Albatross? M.B. Canzoneri, B.T. Diba. Economic Policy Coordination in the EMU: Implications for the Stability and Growth Pact F. Breuss, A. Weber. The Stability Pact and the Interdependence of Monetary and Fiscal Policy Rules A. Hughes Hallett, P. McAdam. Unemployment, Wage Developments and the Economic Policy Mix in Europe S. Collignon. Perspectives for Future Economic Policy Coordination within EMU K. Bayer. Challenges for International Economic Policy Coordination in EMU M. Durand. Coordinating Stability: Some Remarks on the Roles of Monetary and Fiscal Policy under EMU B. Winkler. Index.

International Macroeconomic Policy Coordination: Any Lessons for EMU? A Selective Survey of the Literature

The theoretical case for international coordination was well established, and presumed settled, in the 1970s. In the mid-1980s, the focus of research shifted to intertemporal aspects of economic interdependence. In the early 1990s, the subject no longer generated as much interest among economists as it might have deserved from an economic policy perspective. With EMU, the topic of coordination has once again found its way onto the political and scientific agenda. In fact, the EMU regime not only raises a number of new and important questions concerning policy coordination, it might also be interpreted as a surrogate for far-reaching forms of policy coordination. At the same time, more ambitious forms of coordination are confronted in any case with coordination constraints imposed by the EMU – regime itself, such as the independence provision of the ESCB and the supreme monetary policy goal of maintaining price stability. Without doubt, economists' and political scientists studies on coordination will not be suited to serve as blueprints of policy coordination for policymakers to follow at summit meetings. But even if the key question - how much relevance the abundant literature on coordination may hold for the “real world” – could not be answered definitely, it – at least – provides useful analytical insights in the structure of coordination problems. And an improved analytical understanding of macroeconomic interaction is a necessary prerequisite for more successful efforts at policy coordination.

Gains From International Macroeconomic Policy Coordination in an Interdependent World

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.

Gains from International Macroeconomic Policy Coordination Under Alternative Objective Functions

This paper investigates 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 and government consumption as strategic variables. The implications of different specifications of the objective functions are investigatcd. It is shown that in general. cooperative policies give results that are superior to non-cooperativc Nash equilibrium solutions. The gains from active policy-making and from cooperation depend strongly on the assumptions made about the objective functions. in particular about the weights given to different target variables.

On the Gains from International Macroeconomic Policy Coordination

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.

The Impact of Domestic and Foreign Macroeconomic Variables on U.S. Meat Exports

This paper examines the impact of domestic and foreign macroeconomic variables on U.S. meat exports, including beef, pork, turkey, and chicken, in the context of an open economy. The results show that foreign macroeconomic variables exert more significant and persistent effects on U.S. meat exports than domestic macroeconomic variables. The implication is that the U.S. can increase its meat exports more effectively by expending efforts on international macroeconomic policy coordination rather than on domestic sectoral policy. The results also suggest that macroeconomic models of the agricultural sector should include foreign variables and should not be limited only to domestic ones.

Does model uncertainty really preclude international policy coordination?

We show that uncertainty about the effects of economic policies, far from precluding international macroeconomic policy coordination, may actually provide an additional incentive to coordinate policies. Using 11 global macroeconomic models we find that the welfare gains from coordination which arise solely from the existence of model uncertainty are of roughly the same magnitude as those identified in the standard literature.

International economic structures, government interests, and international coordination of macroeconomic adjustment policies

Analysts have commonly argued that there has been a decline in international coordination of the kinds of policies that governments can use to manage the international payments imbalances that emerge when different governments pursue different macroeconomic policies. The decline typically has been attributed to a posited decline in American hegemony. In contrast, this article argues that international coordination of macroeconomic adjustment policies (trade and capital controls, exchange rate policies, balance-of-payments financing, and monetary and fiscal policies) was at least as extensive for much of the 1980s as it had been in the 1960s. There was, however, a shift away from coordination of balance-of-payments financing and other policies that have limited direct consequences for domestic economic and political conditions and a concurrent shift toward coordination of monetary and fiscal policies that are critically important for domestic politics and economics. This change is best explained as a consequence of changes in the structure of the international economy. Most important, international capital market integration encouraged governments to coordinate monetary and fiscal policies because balance-of-payments financing and exchange rate coordination alone are insufficient to manage the enormous payments imbalances that emerge when capital is able to flow internationally in search of higher interest rates and appreciating currencies.

Portfolio Preference Uncertainty and Gains from Policy Coordination

International macroeconomic policy coordination is generally considered to be made less likely--and less profitable--by the presence of uncertainty about how the economy works. The present paper provides a counter-example, in which increased uncertainty about portfolio preference of investors makes coordination of monetary policy more beneficial. In particular, In the absence of coordination monetary authorities may respond to financial market uncertainty by not fully accommodating demands for Increased liquidity, for fear of bringing about exchange rate depreciation. Coordinated monetary expansion would minimize this danger. A theoretical model incorporating an equity market is developed, and the stock market crash of October 1987 is discussed in the light of its implications for monetary policy coordination.

Portfolio Preference Uncertainty and Gains From Policy Coordination

International macroeconomic policy coordination is generally considered to be made less likely—and less profitable—by the presence of uncertainty about how the economy works. The present paper provides a counter-example, in which increased uncertainty about portfolio preference of investors makes coordination of monetary policy more beneficial. In particular, in the absence of coordination monetary authorities may respond to financial market uncertainty by not fully accommodating demands for increased liquidity, for fear of bringing about exchange rate depreciation. Coordinated monetary expansion would minimize this danger. A theoretical model incorporating an equity market is developed, and the stock market crash of October 1987 is discussed in the light of its implications for monetary policy coordination.

Invested interests: the politics of national economic policies in a world of global finance

Capital moves more rapidly across national borders now than it has in at least fifty years and perhaps in history. This article examines the effects of capital mobility on different groups in national societies and on the politics of economic policymaking. It begins by emphasizing that while financial markets are highly integrated within the developed world, many investments are still quite specific with respect to firm, sector, or location. It then argues that contemporary levels of international capital mobility have a differential impact on socioeconomic groups. Over the long run, increased capital mobility tends to favor owners of capital over other groups. In the shorter run, owners and workers in specific sectors in capital-exporting countries bear much of the burden of adjusting to increased capital mobility. These patterns can be expected to lead to political divisions about whether or not to encourage or increase international capital market integration. The article then demonstrates that capital mobility also affects the politics of other economic policies. Most centrally, it shifts debate toward the exchange rate as an intermediate or ultimate policy instrument. In this context, it tends to pit groups that favor exchange rate stability against groups that are more concerned about national monetary policy autonomy and therefore less concerned about exchange rate stability. Similarly, it tends to drive a wedge between groups that favor an appreciated exchange rate and groups that favor a depreciated one. These divisions have important implications for such economic policies as European monetary and currency union, the dollar-yen exchange rate, and international macroeconomic policy coordination.