Can International Policy Coordination Really Be Counterproductive?

Carlo Carraro, Francesco Giavazzi

NBER Working Paper No. 2669
Issued in July 1988
NBER Program(s):   ITI   IFM

This paper shows that international policy coordination is not counterproductive in a world where the incentive to run beggar-thy-neighbor policies internationally arises from the inefficiency that characterizes, within each country, the interaction between policymakers and private agents. The domestic inefficiency arises from the presence of nominal contracts that give central banks the power to affect real variables. In this setting we show that international cooperation belongs to central banks' dominant strategy. The paper is motivated by a common and misleading interpretation of a paper by Rogoff [1985], namely that international cooperation may be counterproductive in the presence of a domestic inefficiency.

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Published: International Economic Policy Coordination, C. Carraro, D. Lauseel, M. Salmon, and A. Soubeyran (eds.), Oxford: Blackwell, pp. 184-198, 1991.

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