Working Paper: CEPR ID: DP14359
Authors: Giancarlo Corsetti; Martin Bodenstein; Luca Guerrieri
Abstract: The consensus in the recent literature is that the gains from international monetary cooperation are negligible, and so are the costs of a breakdown in cooperation. However, when assessed conditionally on empirically-relevant dynamic developments of the economy, the welfare cost of moving away from regimes of explicit or implicit cooperation may rise to multiple times the cost of economic fluctuations. In economies with incomplete markets, the incentives to act non-cooperatively are driven by the emergence of global imbalances, i.e., large net-foreign-asset positions; and, in economies with complete markets, by divergent real wages.
Keywords: monetary policy; cooperation; global imbalances; open-loop Nash games
JEL Codes: E44; E61; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| welfare costs of moving away from cooperation regimes (F55) | increase significantly (O00) |
| global imbalances and divergent real wages (F66) | welfare costs of moving away from cooperation regimes (F55) |
| net foreign asset positions widen (F32) | gains from cooperation increase (C71) |
| size of imbalances (F32) | incentives for countries to act non-cooperatively increase (F55) |
| nationally-oriented policies costs (H59) | exceed costs of economic fluctuations (E30) |
| structure of international financial markets (G15) | incentives for cooperation or deviation (C72) |