NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

International Policy Coordination in a Dynamic Macroeconomic Model

Jeffrey Sachs

NBER Working Paper No. 1166
Issued in July 1983
NBER Program(s):   ITI   IFM

This paper illustrates the role for macroeconomic policy coordination when interdependent economies are pursuing disinflationary policies. Under flexible exchangerates, policy makers have an incentive to reduce inflation by pursuing contractionary policies that yield a currency appreciation. In a Nash, perfect foresight equilibrium,policy authorities in the model pursue contractionary policies to achieve currency appreciation, but these attempts cancel out, with the result that all countries end up pursuing excessively contractionary policies (relative to asymmetric Pareto optimum). The paper presents these resultsin a two-country, infinite-horizon difference game.

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Document Object Identifier (DOI): 10.3386/w1166

 
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