Given the uncertainty in the current global economic situation, one question arises regarding whether international macroeconomic policy coordination is still relevant. The choice of whether to implement international macroeconomic policy coordination depends on the specific circumstances, as explained in previous literature on the topic. First, the success of cooperation and coordination principally requires the sharing of information and analysis. However, there are differing opinions regarding the need for fiscal consolidation and the extent of adjustments required in surplus countries. Consequently, achieving agreement on these issues will require a process of building trust through shared information and analysis, as well as a collaborative approach (Adam et al., 2012).
Second, cooperative responses to international macroeconomic policy coordination are also influenced by the nature of the disturbances, according to Fischer (1987). When there are positive transmission effects, different countries will require different policies to deal with a shift in demand. In the case of a worldwide disturbance, similar policy responses will be needed in different countries if transmission effects are positive. The objectives of each country also affect the specific policy actions that should be taken. For example, the breakdown of the Bretton Woods system indicates that international differences in policy goals may be too significant for systematic macroeconomic policy coordination among major economies. Nevertheless, occasional agreements and coordination on specific policy packages may still be feasible.
Third, the exchange rate regime is a crucial factor that determines policy interactions as part of international macroeconomic policy coordination between countries. Flexible exchange rates, for instance, can provide countries with insulation from external shocks and more freedom to pursue domestic goals without worrying about foreign reactions or policies, as argued by Fischer (1987). Given the flexibility of exchange rates, it is unlikely that macroeconomic policy coordination among major economies will progress beyond the exchange of information and occasional agreements on specific policy tradeoffs. However, both information sharing and occasional policy agreements under the right circumstances are beneficial and should be encouraged. It should be noted that interdependence has still increased within the flexible rate system. In practice, the slow adjustment of domestic prices and wages assuming prices and wages are sticky in the short run, coupled with the quick adjustment of the exchange rate to policy changes, means that changes in monetary and fiscal policies in one country can rapidly affect the real exchange rate. Additionally, expansionary domestic policies could lead to the anticipation of devaluation, massive capital outflows, and eventually devaluation or a change in policies. Hence, expansionary monetary policy in one country could cause inflation and depreciation of its currency, without necessarily affecting other economies.
Fourth, it is worth considering the fiscal and monetary policy aspects in international macroeconomic policy coordination. Frankel (2015) argues that from a fiscal policy perspective, there is an assumption that fiscal stimulus has positive “spillover effects” on trading partners. Each country may be hesitant to undertake fiscal expansion alone due to concerns about worsening its trade balance, but global conditions could improve if major countries agree to work together as locomotives, pulling the global economy out of a recession. However, despite the popularity of the locomotive theory, coordination does not necessarily mean expansion across the board, as Fischer (1987) points out. The optimal cooperative policies depend on the objectives of policymakers, the nature of the transmission mechanism between the economies, the policy tools at their disposal, and the nature of the disturbances that call for policy responses. Another concern is that policies may be transmitted asymmetrically between countries.
When it comes to monetary policy, regular meetings between officials can be beneficial. For instance, consultation can reduce unexpected events, and in times of crisis, cooperation and exchange of views can help bridge gaps in perceptions. However, some calls for international coordination may be less effective, especially when they attempt to blame other countries in order to divert attention away from domestic issues and disagreements. In other words, calls for coordination can sometimes be misused to conceal domestic problems.
It is imperative to note that with greater economic integration across countries, particularly via the capital account, and asymmetries in exchange rate systems, relying on automatic adjustment mechanisms of the non-system is no longer a practical solution (Adam et al., 2012). Therefore, it is necessary to re-establish policy cooperation to rebalance the global economy and mitigate the negative spillover effects that may result from uncoordinated attempts at rebalancing.
In the long run, there may be an opportunity for countries to coordinate their policies for mutual benefit, as their understanding of policy operations and interdependence grows. While coordination is generally considered better, empirical evidence suggests that the benefits may be relatively insignificant due to the limited impact of policies in one country on others (Fischer, 1987). Additionally, differing views on policy outcomes and uncertainties about their effects may make it difficult to reach an agreement. Thus, the appropriate approach after all might be for each country to focus on keeping its economy stable, at least in the short run.
References
Adam, C., Subacchi, P., and Vines, D. (2012). International Macroeconomic Policy Coordination: An Overview. Oxford Review of Economic Policy, vol. 28, no. 3, pp. 395–410.
Fischer, S. (1987). International Macroeconomic Policy Coordination. NBER Working Papers 2244.
Frankel, J. (2015). International macroeconomic policy coordination. VoxEU CEPR.
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