Working Paper: NBER ID: w18716
Authors: John B. Taylor
Abstract: Research in the early 1980s found that the gains from international coordination of monetary policy were quantitatively small compared to simply getting domestic policy right. That prediction turned out to be a pretty good description of monetary policy in the 1980s, 1990s, and until recently. Because this balanced international picture has largely disappeared, the 1980s view about monetary policy coordination needs to be reexamined. The source of the problem is not that the models or the theory are wrong. Rather there was a deviation from the rule-like monetary policies that worked well in the 1980s and 1990s, and this deviation helped break down the international monetary balance. There were similar deviations at many central banks, an apparent spillover culminating in a global great deviation. The purpose of this paper is to examine the possible causes and consequences of these spillovers, and to show that uncoordinated responses of central banks to the deviations can create an amplification mechanism which might be overcome by some form of policy coordination.
Keywords: Monetary Policy; International Coordination; Financial Crisis
JEL Codes: E5; E58; F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| deviations from rule-like monetary policies at central banks (E58) | global 'great deviation' (F69) |
| low interest rates in one country (E43) | pressures on other countries to lower their rates (F29) |
| low federal funds rate (E43) | currency depreciation (F31) |
| currency depreciation (F31) | impacts on other central banks' policies (E58) |
| common global shocks (F69) | influence on deviations from monetary policies (E49) |
| foreign interest rates (E43) | impact on domestic central bank decisions (E58) |
| deviations from rule-like monetary policies (E60) | breakdown in international monetary balance (F33) |