International Policy Coordination Research Articles

INTERNATIONAL ADJUSTMENTS THROUGH MICRO AND MACROECONOMIC COORDINATION: THE EXAMPLE OF EUROPEAN UNION

The process of ‘globalisation’ now a days leading to a greater interdependence among nations than ever before. And thus greater cross-border spillovers imply an increased need for international policy coordination. The internationalisation of assets and goods market together with the advances in transportation and information technologies, has guaranteed that what happens in one country, especially in a large country, will be felt by other countries. The upsurge in economic integration, in recent times, in the shape of free trade areas, customs union, common markets and various types of preferential association have clearly showed the widespread belief on the value of economic integration. Those interactions are chosen as a way of economic growth, export-led for example, even though they might have some conflicting features. The integration of not less than twelve currencies into a single one in Europe is one of the most amazing facts in the history of modem economics. This paper is primarily based on secondary sources. Extensive literature review has been conducted to frame the concept and issues. Despite the consensus on the benefits of micro and macroeconomic policy coordination, economic blocs still face many difficulties in doing it. Those difficulties arise from countries' varied and usually opposing views and principles about micro and macroeconomic policy. It is undoubtedly difficult to ensure the benefits for all the stakeholders while going for economic growth through opening the economy with all sides. The need for macroeconomic policy co-ordination is obviously a must in an integrated area to realize the full benefits of integration. It must be admitted however, that coordination is a difficult task for countries to do, considering their immense differences. With the increasing number of them forming regional arrangements, one cannot help asking of what path would this cooperation be heading towards-basically a question of success or failure.

International merger policy coordination

I treat international merger policy coordination as a repeated veto game. I derive optimal equilibria and consider comparative statics with respect to a number of exogenous parameters.

Inflation Targeting, Exchange Rate Volatility and International Policy Coordination

In a linear rational expectations two–country model, using an aggregate demand, aggregate supply framework, we analyse the effects of the adoption of an inflation–targeting regime on exchange rate volatility and the possible scope for policy coordination. This analysis is conducted using optimized interest rate policy rules within a calibrated model. Rules for interest rates that respond either to exchange rates or to portfolio shocks give improved performance and permit gains from international coordination. Optimized Taylor rules perform relatively well.

Does international coordination of pension policies boost capital accumulation?

Within an OLG framework we study a perfectly balanced Pay-As-You-Go (PAYG) pension scheme: in spite of its depressive impact on national saving, PAYG is implemented for operating intergenerational transfers. With international capital mobility, the national adoption of PAYG determines a spill-over effect through the world capital stock. This creates a situation of interdependence among national pension policies, that we model as a n-countries dynamic game. In contrast with previous literature, it is shown that in general the international coordination of pension policies does not boost world savings and capital accumulation.

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.

Basic Research and International Spillovers

This paper discriminates between basic and developmental research when estimating international research spillovers between nine OECD nations. Using panel cointegration techniques, the estimates show that basic research generates much larger international spillovers than developmental research. Developmental research in turn appears more easily appropriated by the research performer, and thus has a stronger effect domestically. These results suggest growth models should incorporate the firm's choice between basic and developmental research. More importantly, since basic research receives a large proportion of its funding from public sources, the finding of large international spillovers from basic research suggests current public research policies should be reevaluated. The results support the argument in favor of increased international coordination of basic research policies.

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.

Global Implications of Self-Oriented National Monetary Rules

Author(s): Obstfeld, Maurice; Rogoff, Kenneth | Abstract: It is well known that if international linkages are relatively small, the potential gains to international monetary policy coordination are typically quite limited. But what if goods and financial markets are tightly linked? Is it then problematic if countries unilaterally design their institutions for monetary stabilization? Are the stabilization gains from having separate currencies largely squandered in the absence of effective international monetary coordination? We argue that under plausible assumptions the answer is no. Unless risk aversion is very high, lack of coordination in rule setting is a second-order problem compared to the overall gains from monetary policy stabilization.

A simple approach to international monetary policy coordination

This paper analyzes the strategic interaction between the monetary policymakers of two countries, in an intertemporal general equilibrium model with nominal rigidities and imperfect competition. It offers an excursus on non-cooperative towards cooperative solutions. In a non-cooperative equilibrium the monopolistic allocation prevails in both countries, because of the incentive to use strategically the terms of trade. In a cooperative solution where both policymakers internalize the externalities given by the terms of trade, the competitive allocation is reached. However, cooperation can be counterproductive. We then characterize a problem of delegation in which the set of choice is restricted to the Pareto efficient allocations and in which the participation constraints implied by the non-cooperative equilibrium are taken into account.

National patents, innovation and international agreements

One of the most contentious issues arising from the Uruguay Round of trade negotiations was the attempt to harmonize patent policy. However, previous theoretical models have failed to provide a clear rationale for the coordination of patent policy, indeed they imply that world welfare may decline as a result of coordination. This paper argues that the conclusions of previous studies have been derived from definitions of patents that neglect to specify their duration. As a consequence, the monopoly distortion associated with patents has been overemphasized. In contrast, this paper models the choice of the hazard of imitation under a patent as a policy variable. This allows for a more detailed analysis of the determinants of patent policy in an international context, and isolates two externalities when countries set patent policy independently. These externalities arise from a free-riding incentive (policy competition) and the international spillovers from an innovation. Since these considerations influence the patent strength in both developed and developing countries, patents set on a national basis are inefficient from a global perspective. This provides an economic rational for international coordination of patent policy.

International Monetary Policy Coordination and Financial Market Integration

The welfare gains from international co-ordination of monetary policy are analysed in a two-country model with sticky prices. The gains from co-ordination are compared under two alternative structures for financial markets: financial autarky and risk sharing. The welfare gains from co-ordination are found to be largest when there is risk sharing and the elasticity of substitution between home and foreign goods is greater than unity. When there is no risk sharing the gains to co-ordination are almost zero. It is also shown that the welfare gain from risk sharing can be negative when monetary policy is uncoordinated. JEL Classification: E52, E58, F42

Globalization Facts and Figures

Globalization has become the focus for a wide range of protests against various features of the world economy. This paper aims to give a concise summary of the economic dimensions of globalization, while leaving to one side other aspects—such as cultural, environmental, or political ones—that are beyond the scope of the IMF. Periods of increased globalization have tended to be associated with technological innovations that reduce transportation and communications costs and with generally rising standards of living. Moreover, countries that have embraced openness to the rest of the world have done better than those that have not. Nevertheless, globalization may also be associated with increased inequality and volatility, which may justify strengthening domestic safety nets and financial supervision and regulation, and enhancing international economic policy coordination. The IMF helps to ensure economic gains from globalization by encouraging trade liberalization, reducing countries’ vulnerability to crises, lending to them when they are in difficulty, and assisting them in putting in place structural reforms that help reduce poverty.

Monetary Policy and Co-Ordination in a Globalised World

LA POLITIQUE MONE ´ TAIRE ET LA CO-ORDINATION DANS UN MONDE GLOBALISE ´ Cet article traite des implications d’un environnement international caracterise par un fort degre d’interdependance des differentes zones economiques pour des politiques monetaires orientees vers la stabilite des prix. La forme optimale de telles strategies de politique monetaire se doit de combiner regles et discretion pour simultanement refleter les caracteristiques des economies nationales dans un monde globalise et le besoin d’une communication efficace. Au moins entre les zones economiques de grande taille, la coordination au sens fort du terme n’est pas praticable dans le domaine monetaire. Au contraire, la cooperation monetaire, i.e. l’echange d’information et de vues sans engagements de politique definis, peut ameliorer de maniere significative l’efficacite des mesures de politique monetaire. En fait, l’efficacite de la cooperation entre banques centrales depend de la forme et du fonctionnement adequats des differents forums internationaux ou cette cooperation a lieu. Classification JEL : E5, F0

Rules and discretion with common central bank and separate fiscal authorities

This paper evaluates the implications of international policy coordination under the setting of a common monetary authority and separate fiscal authorities. The paper considers a two-country framework with noncoordinated monetary and fiscal policies. The deviations of output, public expenditure, and inflation from target levels are obtained under symmetric and asymmetric regimes of rules and discretion. The expressions for output, inflation, and government expenditure deviation from target are also obtained under coordinating fiscal authorities and compared with similar expressions under insular fiscal policy making.

International Monetary Policy Coordination and Competitive Depreciation: A Reevaluation

Is there a need for international coordination of monetary policies within the current system of floating exchange rates? In a recent paper, Obstfeld and Rogoff (1995) argue that in an environment of sticky prices, under floating exchange rates monetary policy shocks will generate positive welfare spillovers across countries. This leads to the conclusion that international monetary policy coordination is unnecessary, and may in fact be undesirable, since it nurtures a bias towards high inflation. Our paper shows that these conclusions are dependent on the manner in which prices are set. When firms engage in pricing-to-market (PTM), setting prices in the currency of the buyer, monetary policy tends to have negative welfare spillovers. This gives an incentive to engage in competitive depreciation. In a noncooperative equilibrium, world inflation will be higher, the greater the importance of PTM. With a high degree of PTM, it follows that the case for international monetary policy coordination is restored. If PTM is at an intermediate range, however, international monetary coordination may have no consequences at all.

Multilateral institutions for international economic policy coordination: bargaining vs voting

Abstract. We study a world economy where worldwide policy coordination is essential to optimally stabilize unfavorable common supply shocks. We develop a two-stage game to investigate how to implement the first-best response to these shocks via a multilateral institution, whose board of directors is composed of a representative per each member country. In a first stage, national governments nominate their representatives on the board. In a second stage, the board collectively chooses stabilization policies. We compare the relative merits of two collective choice mechanisms - bargaining and majority voting - in avoiding manipulation of the cooperative agreement through the strategic nomination of national representatives.

Civil Society and European Integration

Nowadays, various processes, events, and changes are discussed under the heading of regional integration. Examples of regional integration include the European Union (EU). States increasingly deal with international interdependence through international policy coordination and integration. Joint decision making can be one way to deal with the negative externalities of interdependence. This article looks mainly at European integration. The question is whether European integration, an example of deep integration, has lessons for other integration schemes. Such lessons, if they exist, could possibly help policymakers in other parts of the world plan their efforts better and maybe avoid some mistakes. Even if many scholars have stressed that European integration is sui generis, it is the assumption of this article that lessons can be learned and that integration in different parts of the world can be compared.

Social Security: National Policies with International Implications

Social security policies within individual countries are determined independently by national governments, but the resulting outcome is inefficient compared with what would result from the international co-ordination of policies. This is because national social security policies produce international externalities via their effects on world interest rates. An illustrative example suggests that the gains from co-ordination are potentially significant. Virtually all countries operate social security (or redistributive) policies. Each chooses policies independently, and to my knowledge no-one, either in a policymaking context or in the large literature on international policy co-ordination, has suggested that such decisions would benefit from international coordination.1 However, a simple argument suggests that independent national social security policies are inefficient: more specifically, in the long run national governments make policy decisions which are too egalitarian. This holds provided that social security lowers national saving. In this case, each national government faces a trade-off between income redistribution and national saving, and can be assumed to locate at the nationally optimal point on this trade-off, taking as given the world interest rate. The latter is clearly not independent of the combined effect of all countries' policies, however: if all countries expand social security, the resulting fall in world saving will raise the world interest rate, with adverse consequences for each national economy. Each country rationally ignores its own (small) contribution to the global outcome. If this international externality were internalised by co-ordination, countries would relocate on the trade-off between income redistribution and national saving. Demonstrating the existence of an externality says nothing about its quantitative significance. I address this with an example which focuses on pay-as-you-go (PAYG) retirement pensions in an economy with a mixture of forward-looking and myopic individuals. The pensions prevent destitution among retired myopes and thus effectively redistribute life time welfare, but they also lower saving because of PAYG financing. For all parameter values considered, international co-ordination of pensions policy decisions generates welfare gains which are larger - for many parameter values substantially larger - than recent estimates of the welfare gains from either the entire elimination of all cyclical fluctuations, or the reduction of inflation and nominal interest rates from suboptimally high to optimal levels. Hence the issues addressed in the paper are quantitatively significant when judged against other frequently-advocated * I am grateful to two anonymous referees for helpful comments on earlier versions; they are not responsible for the present version.

Econometric tests of alternative scale variables in money demand in open economies: International evidence from selected OECD countries

The choice of the scale variable in the money demand function is important because of its striking implications on the magnitude and direction of the domestic monetary and fiscal policy effects and effectiveness of international policy coordination. In this study several tests are applied to the money demand functions of Japan, Germany, Canada, France, and Italy in an open economy context to determine the appropriate scale variable for each country. Both narrow and broad definitions of money are used. Income, disposable income, consumption, private spending, and domestic absorption are investigated as contenders for the scale variable. The findings indicate that the scale variable is country-specific, rather than universal, and it is sensitive to the definition of money.

The international policy coordination to reduce the financial volatility in north East Asia

This paper examines the feasibility of introducing the Tobin tax system to reduce financial volatility in international foreign exchange markets based on the understanding of financial crisis as a self‐fulfilling crisis of speculators’ belief system. Based on a model analysis, which assumes a speculator from a third country and two governments competing for capital inflows, this paper demonstrates that a country has a less incentive to deviate from the international policy coordination with respect to the Tobin tax system when the country shows less dependency on financial transaction business in its national income. In addition, when the country is more stable in its current account balance and foreign reserves, it is more likely that the country abides by the policy coordination. Therefore, it is required to offer such incentives as allowing all tax revenues to the collecting governments, when the participating countries are relatively more dependent on the financial transaction business as a source of national income.