Capital Accumulation, Inflation and Long-Run Conflict in International Objectives

Frederick (Rick) van der Ploeg

No 115, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: It is shown that, when there is a genuine long-run trade-off between inflation and output, coordination under pre-commitment yields substantial improvements in economic welfare. The analysis is conducted within the context of a two-country model with capital accumulation, immobile labour, perfect capital mobility and floating exchange rates. If the home government increases its monetary growth rate, it increases home inflation, reduces the world real interest rate and therefore boosts both home and foreign capital accumulation. The foreign country thus enjoys a gain in output without suffering from higher inflation. Competitive policies lead to monetary policies which are too tight and levels of activity which are too low, since each country attempts to be a "free rider". Coordination leads to a lower world real interest rate and higher welfare. Pre-commitment is necessary, for the success of coordinated policies, however. Otherwise each government has an incentive to renege and levy a "surprise" inflation tax. In the absence of binding contracts or reputation effects, both cooperation and competitive policy formulation lead to excessive monetary growth rates and higher levels of activity than under coordination or competition with pre-commitment. Coordination can be futile, since it exacerbates the lack of credibility perceived by the private sectors.

Keywords: Capital Accumulation; Credibility; Interdependence; Monetary Policy; Policy Coordination; Precommitment (search for similar items in EconPapers)
Date: 1986-06
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=115 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Capital Accumulation, Inflation and Long-run Conflict in International Objectives (1990)
Working Paper: Capital accumulation, inflation and long-run conflict in international objectives (1990)
Working Paper: CAPITAL ACCUMULATION, INFLATION AND LONG-RUN CONFLICT IN INTERNATIONAL OBJECTIVES (1989)
Working Paper: Capital accumulation, inflation and long-run conflict in international objectives (1989)
Working Paper: Capital accumulation, inflation and long-run conflict in international objectives (1989)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:115

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... pers/dp.php?dpno=115

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().