Working Paper: NBER ID: w21793
Authors: Joshua Aizenman
Abstract: This paper highlights the rare conditions leading to international cooperation, and the reasons why eliciting this cooperation may be beneficial in preventing adverse tail shocks from spiraling into global depressions. In normal times, deeper macro cooperation among countries is associated with welfare gains akin to Harberger’s second-order magnitude triangle, making the odds of cooperation low. When bad tail events induce imminent and correlated threats of destabilizing financial markets, the perceived losses have a first-order magnitude of terminating the total Marshalian surpluses. The apprehension of these losses in times of peril may elicit rare and beneficial macro cooperation. We close the paper by overviewing the obstacles preventing cooperation, and the proliferation of precautionary policies of emerging market economies as a second-best outcome of limited cooperation.
Keywords: No keywords provided
JEL Codes: F36; F41; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| adverse tail events (G14) | international cooperation (F53) |
| perceived first-order magnitude of potential losses (G41) | international cooperation (F53) |
| imminent threats (F52) | international cooperation (F53) |
| financial collapse (G33) | international cooperation (F53) |
| lack of action (Y70) | undervalued benefits of cooperation (C71) |
| marginal benefits of cooperation < marginal costs (D70) | lack of action (Y70) |
| Federal Reserve's activation of swap lines (F33) | international cooperation (F53) |