15 December 2013

iMFdirect: International policy coordination - The Loch Ness Monster

International policy coordination is like the Loch Ness monster: much discussed but rarely seen. Going back over the decades, and even further in history to the period between the Great Wars, coordination efforts have been episodic.

Authors: Olivier Blanchard, Jonathan D Ostry and Atish R Ghosh

Today, policy coordination has resurfaced as a hot topic: while the worst of the global financial crisis is behind us, no one would claim that a return to “Great Moderation” is in the cards, and policymakers around the globe appear worried about policy transmissions across many dimensions...

What can we learn both from the successful coordination cases and the less successful ones? First, there have to be large and clear gaps between cooperating and not cooperating to overcome the tendency of countries to solve their problems unilaterally. And it must also be clear how each player can contribute to the global outcome. When coordination implies that all players have to do the same thing (say, expand fiscal policy, or refrain from competitive depreciations), coordination is likely to be easier to explain and to achieve. When the quid pro quo is more complex, coordination is likely to be more difficult and may just not happen—even if on paper the gains are large.

Can something better be done?  There would seem to be a role for a ‘neutral assessor’ to clarify the nature of spillover effects and thus make it easier to establish and sustain cooperative outcomes. The IMF already plays a role as an assessor through its country surveillance and, by recognising the increased interconnectedness across countries, it is playing a greater role in identifying spillovers. Here it can help identify policies that would be in both the national and global interest.

Is there more that could be done? There may be times when the scope for mutually advantageous policies simply is not there: for example, when a large country’s policies exert adverse spillovers across a swath of smaller countries but the actions of the smaller players do not materially affect economic outcomes in the large country.

Would some guideposts or rules of the road (analogous to the rules that originally underpinned Bretton Woods—e.g. against competitive depreciation) help to limit the scope for adverse spillovers be desirable in such cases? The logic of such rules seems compelling. The guideposts could take the form of warnings, or stronger measures, when current accounts deviate too much from current account norms, or when some aspects of a country’s capital account become too unbalanced, contributing to credit or asset price boom-bust cycles abroad.

The authors' sense is that, like the Loch Ness monster, international macro policy coordination may continue to be heard about more often than it is seen. There are important obstacles to reaping the gains from coordination. To help overcome those, the circumstances when gains are likely to be large need to be identified and a push made for specific coordinated outcomes in such cases. And when the gains from coordination are not there, this needs to be acknowledged. But even in such cases, if large players in the global economy are responsible for significant adverse spillovers across a swath of smaller countries, this needs to be acknowledged as well, and feasible remedies considered.

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