Working Paper: NBER ID: w1166
Authors: Jeffrey Sachs
Abstract: This paper illustrates the role for macroeconomic policy coordination when interdependent economies are pursuing disinflationary policies. Under flexible exchangerates, policy makers have an incentive to reduce inflation by pursuing contractionary policies that yield a currency appreciation. In a Nash, perfect foresight equilibrium,policy authorities in the model pursue contractionary policies to achieve currency appreciation, but these attempts cancel out, with the result that all countries end up pursuing excessively contractionary policies (relative to asymmetric Pareto optimum). The paper presents these resultsin a two-country, infinite-horizon difference game.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Contractionary policies (E65) | Failure in achieving desired currency appreciation (F31) |
| Failure in achieving desired currency appreciation (F31) | Lower output (E23) |
| Contractionary policies (E65) | Lower output (E23) |
| Contractionary policies (E65) | Unchanged inflation rates (E31) |
| Inflation reduction strategies employed by one country (E31) | Increased inflation in another (E31) |