Model Uncertainty. Learning, and the Gains from Coordination

International Monetary Fund

No 1988/114, IMF Working Papers from International Monetary Fund

Abstract: The paper considers gains from international economic policy coordination when there is uncertainty concerning the functioning of the world economy, but also learning about the “true” model on the part of policymakers. The paper reports estimates of plausible alternative versions of a standard, two-country model. Activist policy (either coordinated or uncoordinated) may produce large welfare losses in the absence of learning, if policymakers believe in the wrong model; hence exogenous money targets and freely flexible exchange rates may be best. However, model learning (from observations on macroeconomic variables) causes coordinated policies to dominate activist uncoordinated policies or exogenous money targets.

Keywords: WP; policy intervention; policy regime; policy coordination; Nash equilibrium; policy experiment; exchange rate; optimal policy; policy choice; policy rule; policy coordination experiment; Nash regime; model III; Exchange rates; Inflation; Monetary base; Floating exchange rates; Demand for money; Global (search for similar items in EconPapers)
Pages: 38
Date: 1988-01-01
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Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:1988/114

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