DP77 | How Much Could the International Coordination of Economic Policies Achieve? An Example from US-EEC Policy Making

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The economic recessions since 1973 have emphasised the interdependence of the major economies and their policy choices. This paper examines whether decentralised control of the world economy effectively limits our ability to manage individual economies. It is well known that noncooperative policies are Pareto inefficient; but there is, as yet, no empirical evidence on the costs of uncoordinated policies, or the potential gains and risks in cooperation. In contrast to recent theoretical work in the area, this paper uses an estimated multicountry model in a dynamic game framework to estimate those costs and benefits. Policy design depends crucially on the asymmetries between economies. Successful coordination depends on anticipations, and on timing the fiscal and monetary policy impacts correctly. The gains from sustainable cooperation are relatively small and benefit Europe.