International Policy Coordination
The international economy comprises sovereign nations, each free to choose its own economic
policies. Unfortunately, in an integrated world economy, one country’s economic
policies usually affect other countries as well. For example, when Germany’s Bundesbank
raised interest rates in 1990—a step it took to control the possible inflationary impact of
the reunification of West and East Germany—it helped precipitate a recession in the rest of
Western Europe. Differences in goals among countries often lead to conflicts of interest.
Even when countries have similar goals, they may suffer losses if they fail to coordinate
their policies. A fundamental problem in international economics is determining how to
produce an acceptable degree of harmony among the international trade and monetary
policies of different countries in the absence of a world government that tells countries
what to do.
For almost 70 years, international trade policies have been governed by an international
treaty known as the General Agreement on Tariffs and Trade (GATT). Since 1994, trade
rules have been enforced by an international organization, the World Trade Organization,
that can tell countries, including the United States, that their policies violate prior agreements.
We discuss the rationale for this system in Chapter 9 and look at whether the current
rules of the game for international trade in the world economy can or should survive.
While cooperation on international trade policies is a well-established tradition, coordination
of international macroeconomic policies is a newer and more uncertain topic.
Only in the past few years have economists formulated at all precisely the case for
macroeconomic policy coordination. Nonetheless, attempts at international macroeconomic
coordination are occurring with growing frequency in the real world. Both the
theory of international macroeconomic coordination and the developing experience are
reviewed in Chapter 19.
International Policy Coordination
The international economy comprises sovereign nations, each free to choose its own economic
policies. Unfortunately, in an integrated world economy, one country’s economic
policies usually affect other countries as well. For example, when Germany’s Bundesbank
raised interest rates in 1990—a step it took to control the possible inflationary impact of
the reunification of West and East Germany—it helped precipitate a recession in the rest of
Western Europe. Differences in goals among countries often lead to conflicts of interest.
Even when countries have similar goals, they may suffer losses if they fail to coordinate
their policies. A fundamental problem in international economics is determining how to
produce an acceptable degree of harmony among the international trade and monetary
policies of different countries in the absence of a world government that tells countries
what to do.
For almost 70 years, international trade policies have been governed by an international
treaty known as the General Agreement on Tariffs and Trade (GATT). Since 1994, trade
rules have been enforced by an international organization, the World Trade Organization,
that can tell countries, including the United States, that their policies violate prior agreements.
We discuss the rationale for this system in Chapter 9 and look at whether the current
rules of the game for international trade in the world economy can or should survive.
While cooperation on international trade policies is a well-established tradition, coordination
of international macroeconomic policies is a newer and more uncertain topic.
Only in the past few years have economists formulated at all precisely the case for
macroeconomic policy coordination. Nonetheless, attempts at international macroeconomic
coordination are occurring with growing frequency in the real world. Both the
theory of international macroeconomic coordination and the developing experience are
reviewed in Chapter 19.
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