NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Coordination of Monetary and Fiscal Policies in the OECD

Warwick J. McKibbin, Jeffrey Sachs

NBER Working Paper No. 1800
Issued in 1986
NBER Program(s):   ITI   IFM

Discontent with the functioning of the world monetary system has led to many proposals for international monetary reform. These proposals range from enhanced consultations under the current regime of floating exchange rates to a regime of fixed exchange rates, as proposed by Ronald McKinnon. In this paper we examine the implications of several alternative monetary arrangements for fiscal policy in the world economy. In particular we focus upon two issues. The first is the effects of alternative monetary arrangements on the international transmission of fiscal policy. The second is the implications of the alternative regimes for strategic aspects of fiscal policymaking.As is generally the case in the discussion of exchange regimes we find that the choice of the monetary system is crucially dependent upon the source and nature of the shocks hitting the world economy. In this paper we show that the monetary regime also has important implications for the transmission offiscal policy in the world economy and for the nature of the strategic games played by fiscal authorities. Rigid rules of the game, as under fixedexchange rates, do not necessarily eliminate the inefficient equilibriathat can occur when fiscal authorities behave non-cooperatively.

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Document Object Identifier (DOI): 10.3386/w1800

Published: McKibbin, Warwick and Jeffrey D. Sachs "Coordination of Monetary and Fiscal Policies in the OECD," International Aspects of Fiscal Policies, ed. J. Frenkel, Chicago: UCP, 1988.

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