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Title:Optimum policy domains in an interdependent world PDF Logo
Authors:Evers, Michael P.
Issue Date:2007
Series/Report no.:Bonn econ discussion papers 2007,12
Abstract:In this paper, I argue that international policy coordination requires to include both monetary as well as fiscal policy because both sides include policy instruments that allow the strategic manipulation of the country's terms of trade. Hence, the coordination of one part of national macroeconomic policies through an international agreement still leaves room for national authorities to still unilaterally manipulate the terms of trade by means of different policy instruments. In a simple and tractable dynamic stochastic two-country sticky-wage model in line with the recent New Open Economy Macroeconomics it is demonstrated that potential gains from international policy coordination are squandered if policymakers only cooperate on monetary policy. Moreover, by letting the fiscal policy instruments be chosen non-cooperatively, monetary policy coordination might even create welfare losses as compared to no macroeconomic policy coordination at all.
Subjects:International Policy Coordination
General Short-Run Monetary Policy
Distorting Fiscal Policy
Beggar-Thy-Neighbor
New Open Economy Macroeconomics
JEL:F41
F42
E62
E63
Document Type:Working Paper
Appears in Collections:Bonn Econ Discussion Papers, Bonn Graduate School of Economics (BGSE), Universität Bonn

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