Working Paper: NBER ID: w2244
Authors: Stanley Fischer
Abstract: Increasing integration of the world economy, in both trade and capital markets, holds out the promise of mutual gains to countries from the coordination of their macroeconomic policy decisions. In this paper I describe the theoretical case for coordination, evaluate empirical estimates of the potential gains, review the history of macroeconomic policy coordination, and discuss the prospects for increased coordination. The theoretical argument is seen most clearly in the consideration of fiscal expansion. Any one country that expands will create a current account deficit; all countries expanding together avoid that problem. In principle coordination is always better, but empirical estimates suggest the likely gains are small because the effects of policy in one country on the economies of other countries are small. Further, uncertainties about the effects of policy, reflected in differences among econometric models, mean that countries may have very different views on the likely outcomes of agreements--and therefore that some of them are bound to be disappointed. Information exchanges and some coordination on trade policy take place in a large number of international organizations and frameworks. But the breakdown of the Bretton Woods system suggests that international differences in policy goals are too large for systematic macroeconomic policy coordination among the major economies to take place anytime soon. Occasional agreements on particular policy packages are possible, and coordination does take place in the framework of the European Monetary System.
Keywords: macroeconomic policy; international coordination; fiscal policy; economic integration
JEL Codes: F42; E61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal expansion in one country (E62) | Current account deficit (F32) |
| Coordination of fiscal policies (F42) | Avoid current account deficits (F32) |
| U.S. fiscal expansion (E62) | Increase in foreign output (F29) |
| U.S. fiscal expansion (E62) | Increase in foreign prices (F31) |
| Coordination of fiscal policies (F42) | Limited interdependence among economies (F69) |
| Competitive devaluations (F31) | Negative spillover effects (D62) |