Working Paper: CEPR ID: DP2856
Authors: Maurice Obstfeld; Kenneth Rogoff
Abstract: It is well known that if international linkages are relatively small, the potential gains to international monetary policy coordination are typically quite limited. What if, however, goods and financial markets are tightly linked? Is it then problematic if countries unilaterally design their institutions for monetary stabilization? Are the stabilization gains from having separate currencies largely squandered in the absence of effective international monetary coordination? We argue that under plausible assumptions the answer is no. Unless risk aversion is very high, lack of coordination in rule setting is a second-order problem compared to the overall gains from monetary policy stabilization.
Keywords: International policy coordination; Monetary institutions; Monetary policy rules
JEL Codes: E42; F33; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| absence of effective international monetary coordination (F33) | gains from monetary policy stabilization (E63) |
| self-oriented national monetary rules (E60) | outcomes nearly as effective as globally coordinated monetary authority (F42) |
| stabilization gains from separate currencies (F31) | not largely squandered due to lack of coordination in rule setting (E61) |
| Nash equilibrium from unilateral national monetary policy choices (E19) | closely mirrors effects of cooperative choices (C71) |