GEI Projects

6. OPTIMAL INTERNATIONAL REGIMES AND GLOBAL ECONOMIC INSTITUTIONS

Principal Researchers

Professor ANDREW HUGHES-HALLETT
Professor RONALD MACDONALD
Department of Economics
University of Strathclyde


Contact
Professor Hughes-Hallett
Professor MacDonald
Department of Economics
University of Strathclyde
Glasgow Gl 1XQ

Tel: 0141 552 4400
Fax: 0141 552 5589
Email: economics@strath.ac.uk

Duration
1 November 1994 – 31 October 1997

AIMS AND OBJECTIVES

To examine the extent to which policy regimes imposed on different sectors of the industrial economies are mutually dependent, and must be therefore jointly designed and jointly operated:

to examine the importance of the spillovers and interdependence between different market and policy regimes currently operated or under consideration by the leading industrial economies.

to assess the costs of the assignment structures which current instituitional arrangements imply

to investigate the political-economy and technical reasons whcih led to those arrangments

to show the value of inter-regime and inter-institution coordination, and the costs of a lack of ‘convergence’.

to consider the question of regime choice for economic policy

STUDY DESIGN

This project has two parts. The first approaches the problem of regime choice using a variety of economic modelling techniques to pick out the links between different policy regimes, both in terms of how they have performed historically (since 1918) and in terms of their suitability for today’s world of interdependent economies. We set those regimes in a simultaneous game format to illustrate the pattern and strength of the linkages, and study the overlaps when policy ‘games’ are played. This is all set in a multicountry context, and illustrates the robustness (or lack of robustness) of the different regimes when they interact, the consequences of noncooperative behaviour, and the possibilities for trading changes in behaviour between regimes. This allows us to draw some conclusions on the appropriate design of institutions to underpin the smooth functioning of a world subject to these policy regimes. Although the methods which will be developed are general ones, the particular example which we will concentrate on concerns linkages between fiscal and monetary policy.

The second part of the project invloves exercises in quantitative economic history. It will concentrate on one particular aspect of regime choice, the fixity of the exchange rate regime. First of all the research uses target zone methods to examine the classical and inter-war gold standards and their credibility. Second, it examines the need for credible exchange rate systems to be accompanied by supporting fiscal policy; and conversely for a disciplined fiscal policy to be accompanied by a consistent monetary policy. The research is also examining this credibility issue in some detail for the recent floating exchange rate regime using a capital-asset-pricing model.

POLICY IMPLICATIONS

The outputs of the project will be relevant to ongoing policy discussions, in particular of: (i) how fiscal and monetary policy should be coorinated; and (ii) what any moves towards more fixed exchange rate regimes require in terms of supporting policy framework.