3 - International coordination of macroeconomic policies: still alive in the new millennium?

Summary

Introduction

The subject of this chapter is macroeconomic policy coordination among developed countries. The chapter covers both the findings of theoretical models of policy coordination and the historical experience of coordination between policy-makers in different countries. Most importantly, the chapter assesses the extent to which models of policy coordination capture the key features of practical experience. For areas where the models and experience diverge, we attempt to draw some lessons for both modellers and policy-makers.

The past few decades have seen the development of theoretical and empirical models designed to explore the benefits of international macroeconomic policy coordination. The models highlight the fact that macroeconomic policy actions in one country affect economic welfare in other countries; that is, they have externalities for other countries. The key insight of the models is that coordination of policies among countries that takes into account these externalities may lead to higher welfare for all countries. Starting with this key insight, the modelling of international policy coordination has moved in many different directions addressing such issues as the types of problems that coordination is best suited to address, which policies are best suited to address which problems, the means of enforcing international agreements, the roles that uncertainty and information sharing play in the coordination process and the measurement of the gains from policy coordination.