Working Paper: CEPR ID: DP190
Authors: Gerry Holtham; Andrew Hughes Hallett
Abstract: The main obstacles to coordinating policies in practice are uncertainty about the correct model to use for policy design, and uncertainty about external variables. This paper examines the former problem. Numerical calculations using ten models from the recent Brookings Multicountry comparison exercise showed both policies and the gains to coordination are quite sensitive to model variations - and hence to model errors. A framework is therefore set up in which policy-makers are able to choose their model and their policies jointly in order to try and protect the gains from coordination from potential model misspecifications and/or disagreements over which model is most appropriate. That produces an alternative policy bargaining system and better results in terms of the success of coordination.
Keywords: international policy cooperation; model uncertainty; coordination gains; policy robustness
JEL Codes: 026; 122; 133; 400; 423
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| True model agreement (C52) | Larger welfare gains from cooperation (D69) |
| Model misspecification (C52) | Welfare losses from cooperation (D69) |
| Cooperative regimes (P13) | Reduced volatility of policy variables (E63) |