When international policy coordination matters: an empirical analysis

Abstract

The interdependence of national economies implies externalities in policy making, and these externalities lead to inefficient outcomes when policy makers are decentralized and independent. These externalities have been well documented from a theoretical point of view. This paper reports our attempts to discover when and if policy coordination matters, using the Liverpool World Model, which exhibits strong spillover effects for monetary policy and would therefore, we thought, yield very different results from those of earlier researchers. However, strong spillover effects do not guarantee that cooperative policies will differ much from the uncooperative; other aspects of the game's structure can be equally important. Indeed, we found many plausible game situations in which the uncooperative and cooperative solutions are so close together as to be operationally indistinguishable, given the precision with which central banks seem to be able to control their money supplies. We also found situations in which coordination makes a big difference.

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