International Coordination in the Design of Macroeconomic Policy Rules

52 Pages Posted: 1 Jun 2004 Last revised: 13 Feb 2022

See all articles by John B. Taylor

John B. Taylor

Stanford University; National Bureau of Economic Research (NBER)

Date Written: November 1984

Abstract

The paper examines international issues that arise in the design and evaluation of macroeconomic policy rules. It begins with a theoretical investigation of the effects of fiscal and monetary policy in a two-country rational expectations model with staggered wage and price setting and with perfect capital mobility. The results indicate that with the appropriate choice of policies and with flexible exchange rates, demand shocks need not give rise to international externalities or coordination issues. Price shocks, however, do create an externality, and this is the focus of the empirical part of the paper. Using a simple 7 country model -- consisting of Canada, France, Germany, Italy,Japan, the United Kingdom, and the United States -- optimal cooperative and non-cooperative (Nash) policy rules to minimize the variance of output and inflation in each country are calculated. The cooperative policies are computed using standard dynamic stochastic programming techniques and the non-cooperative policies are computed using an algorithm developed by Finn Kydland. The central result is that the cooperative policy rules for these countries are more accommodative to inflation than the non-cooperative policy rules.

Suggested Citation

Taylor, John B., International Coordination in the Design of Macroeconomic Policy Rules (November 1984). NBER Working Paper No. w1506, Available at SSRN: https://ssrn.com/abstract=336271

John B. Taylor (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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