Obstacles to International Macroeconomic Policy Coordination

Abstract

The paper examines a fundamental obstacle to international coordination. Each country must decide what policy changes it wants the other to undertake. But three kinds of uncertainty interfere: (1) the initial position of the economy, (2) the objective function, and (3) the effects of policy instruments. Numerical examples, using major economic models, show that such uncertainty means that the domestic country cannot be sure whether it should want the foreign country to expand or contract. While the results are discouraging for the success of coordination narrowly defined, there is more scope for international cooperation defined broadly to include the exchange of information.