Introduction

In recent years, appreciable advances have been made in the application of dynamic game theory to the design of macroeconomic policies for open, interdependent economies (see, for example, the papers in Buiter and Marston, 1985 and Bryant and Portes, 1987). Whereas the earlier literature (for example, Hamada, 1979; Cooper, 1985) analysed issues of international policy cooperation in the context of games between governments, the more recent literature has recognised the central role played by private agents making rational forward expectations about future policy moves. This literature therefore places at centre stage issues of reputation and credibility in policy-making, and it has integrated the analysis of reputation in a single economy context (see, for example, Barro and Gordon, 1983b) with the literature on international cooperation (Levine and Currie, 1987a). This analysis has permitted a more convincing analysis of the sustainability of cooperation and reputation in policy design.

In previous work by the authors, these developments have been applied to an empirically based international model to analyse the gains from cooperation and reputation in international macropolicy. Using Minilink, a reduced two-bloc version of the OECD Interlink model, Currie, Levine and Vidalis (1987) (Chapter 10) examined four separate policy regimes: cooperation with reputation (CR), cooperation without reputation (CNR), non-cooperation with reputation (NCR) and non-cooperation without reputation (NCNR). They found that the benefits from cooperation and reputation were largely joint, in that reputation without cooperation was counterproductive, as was cooperation without reputation.