DP258 Can International Policy Coordination Really Be Counterproductive?

Author(s): Carlo Carraro , Francesco Giavazzi

Publication Date: August 1988

Keyword(s): Institutions , International Cooperation , Monetary Policy , Sequential Games

JEL(s): 311 , 422 , 431 , 432

Programme Areas: International Macroeconomics

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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 the central banks' dominant strategy. The paper is motivated by a common and misleading interpretation of a paper by Rogolf `1985(, namely that international cooperation may be counterproductive in the presence of a domestic inefficiency.