Working Paper: NBER ID: w2669
Authors: Carlo Carraro; Francesco Giavazzi
Abstract: This paper shows that international policy coordination is not counterproductive in a world where the incentive to run beggar-thy-neighbor policies internationally arises from the inefficiency that characterizes, within each country, the interaction between policymakers and private agents. The domestic inefficiency arises from the presence of nominal contracts that give central banks the power to affect real variables. In this setting we show that international cooperation belongs to central banks' dominant strategy. The paper is motivated by a common and misleading interpretation of a paper by Rogoff [1985], namely that international cooperation may be counterproductive in the presence of a domestic inefficiency.
Keywords: International Policy Coordination; Central Banks; Game Theory; Nominal Contracts
JEL Codes: E52; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| presence of nominal contracts (D86) | effectiveness of international cooperation (F55) |
| international cooperation among central banks (F33) | payoffs for each central bank (E58) |
| lack of international cooperation (F55) | suboptimal economic welfare (D69) |
| international cooperation (F53) | unique subgame perfect equilibrium (C72) |