DP108 | The Impact of Interdependence on Economic Policy Design: The Case of the US, EEC and Japan

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The world's industrialised economies have become increasingly interdependent over the past 30 years. The policy implications of this mutual dependence obviously depend on the spillover effects between economies: but work on this topic has used simplified models of hypothetical economies, and has therefore failed to clarify the implications of interdependence for policy choices. This paper applies different strategies to linked models of the United States, EEC and Japanese economies to evaluate the importance of spillover effects in policy design. The results indicate that interdependence has strong but asymmetric effects due to differing degrees of market flexibility. The United States performance dominates, while Japanese policies have little impact on the rest of the world. Matching policies produces poor results.