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3 - International coordination of macroeconomic policies: still alive in the new millennium?
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- By Laurence H. Meyer, Distinguished Scholar, Center for Strategic and International Studies in Washington, DC; Senior Advisor and Director, Macroeconomic Advisors, Brian M. Doyle, Economist in the Division of International Finance, Federal Reserve Board, Joseph E. Gagnon, Assistant Director in the Division of International Finance, Federal Reserve Board, Dale W. Henderson, Senior Adviser in the Division of International Finance, Federal Reserve Board; Professor of Economics, Georgetown University
- Edited by David Vines, University of Oxford, Christopher L. Gilbert, Universiteit van Amsterdam
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- Book:
- The IMF and its Critics
- Published online:
- 04 December 2009
- Print publication:
- 26 February 2004, pp 59-105
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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.
5 - Uncertainty, instrument choice, and the uniqueness of Nash equilibrium: microeconomic and macroeconomic examples
- from I - Monetary institutions and policy
- Edited by Sylvester C. W. Eijffinger, Katholieke Universiteit Brabant, The Netherlands, Harry P. Huizinga, Katholieke Universiteit Brabant, The Netherlands
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- Book:
- Positive Political Economy
- Published online:
- 05 September 2013
- Print publication:
- 09 March 1998, pp 120-153
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Summary
Introduction
This chapter contains two examples of static, symmetric, positive-sum games with two strategic players and a play by nature: (1) a microeconomic game between duopolists with joint costs facing uncertain demands for differentiated goods and (2) a macroeconomic game between two countries with inflation-bias preferences confronting uncertain demands for money. In both games, each player can choose either of two variables as an instrument. In our terminology, both are linear-reaction-function games because reaction functions are linear in the chosen instruments.
More than a century ago, it was discovered that there are both Cournot (1838) and Bertrand (1883) equilibria for duopoly games with no uncertainty. There are many examples of multiple (Nash) equilibria in linear-reaction-function games with no uncertainty. In the standard differentiated duopoly game with linear demands and independent, quadratic costs, there are four equilibria if each duopolist can choose either price or quantity as an instrument. That is, there are as many equilibria as there are possible pairs of instrument choices. Likewise, in two-player macroeconomic games with quadratic utilities and linear economies there are as many equilibria as there are possible pairs of instrument choices.
The explanation of the existence of multiple equilibria in linear-reaction-function games with no uncertainty is the same as the explanation of a familiar result. Poole (1970) and Weitzman (1974) show that with no uncertainty a single controller is indifferent among instruments. Likewise, with no uncertainty if one player chooses his instrument and sets a value for it, the other is indifferent among instruments.
5 - Hard-ERM, hard ECU and European Monetary Union
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- By David Currie, London Business School and CEPR, Dale W. Henderson, Board of Governors of the Federal Reserve System, Andrew J. Hughes Hallett, University of Strathclyde and CEPR
- Edited by Matthew B. Canzoneri, Georgetown University, Washington DC, Vittorio Grilli, Birkbeck College, University of London, Paul R. Masson, International Monetary Fund Institute, Washington DC
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- Book:
- Establishing a Central Bank
- Published online:
- 05 March 2012
- Print publication:
- 30 July 1992, pp 127-163
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Summary
Introduction
The vision of Monetary Union in Europe is of long standing. The Werner Report of 1970 advocated the attainment of Monetary Union by 1980, but was buried beneath a soaring oil price and the collapse of Bretton Woods and the move to generalised floating in the early 1970s. The European Community, with some key exceptions, returned to an adjustable peg exchange rate system in 1979 with the launch of the Exchange Rate Mechanism (ERM for short). Helmut Schmidt and Valery Giscard d'Estaing embarked on the ERM against majority technical advice from economists at the time, but despite that the ERM must be judged an appreciable success: much more durable than its critics expected, and much more successful in establishing a credible and stable framework for anti-inflationary policy. Even the British have finally been won round.
In the early years of the ERM, parity realignments were frequent and sometimes large, on occasions requiring the temporary closure of foreign exchange markets while bargaining over the realignment went on. These frequent realignments were necessary because of the diversity of inflation rates between the participating countries. But the gradual convergence of inflation rates, itself a product of the ERM, led over time to smaller and less frequent realignments. This is illustrated in Figure 5.1, which shows realignments of the participating countries against the Deutsche Mark, which over this period did not devalue against any currency.