Working Paper: CEPR ID: DP258
Authors: Carlo Carraro; Francesco Giavazzi
Abstract: This paper shows that international policy coordination is not counterproductive in a world where the incentive to run beggar-thy-neighbor policies internationally arises from the inefficiency that characterizes, within each country, the interaction between policymakers and private agents. The domestic inefficiency arises from the presence of nominal contracts that give central banks the power to affect real variables. In this setting we show that international cooperation belongs to the central banks' dominant strategy. The paper is motivated by a common and misleading interpretation of a paper by Rogolf `1985(, namely that international cooperation may be counterproductive in the presence of a domestic inefficiency.
Keywords: international cooperation; monetary policy; institutions; sequential games; subgame perfection
JEL Codes: 431; 432
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| international cooperation (F53) | domestic inefficiencies (D61) |
| nominal contracts (K12) | inefficiencies (D61) |
| nominal contracts (K12) | central banks affect real variables (E52) |
| central banks affect real variables (E52) | cooperation leads to better outcomes (D70) |
| cooperation leads to better outcomes (D70) | cooperative equilibrium is the only subgame perfect equilibrium (C71) |