International Macroeconomic Policy Coordination When Policymakers Do Not Agree on the True Model

Jeffrey Frankel and Katharine Rockett

American Economic Review, 1988, vol. 78, issue 3, 318-40

Abstract: The authors relax the assumption of the literature on international coordination that policymakers know the true model. T wo countries will still be able to agree on a cooperative policy pack age that each believes will improve the objective function relative t o the Nash noncooperative solution. However, the bargaining solution may move the target variables in the wrong direction. These points ar e illustrated with monetary and fiscal multipliers taken from simulat ions of ten leading econometric models. Out of 1,000 possible combina tions of models that could represent U.S. beliefs, non-U.S. beliefs, and the true model, monetary coordination improves U.S. welfare in on ly 546 cases. Copyright 1988 by American Economic Association.

Date: 1988
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