## International Policy Coordination: The Loch Ness Monster _IMF Blog, December 15, 2013_ ## Source details **Canonical URL:** [International Policy Coordination: The Loch Ness Monster](https://www.imf.org/en/blogs/articles/2013/12/15/international-policy-coordination-the-loch-ness-monster) ## Other formats - [Markdown version](/en/blogs/articles/2013/12/15/international-policy-coordination-the-loch-ness-monster/index.md) - [Structured JSON version](/en/blogs/articles/2013/12/15/international-policy-coordination-the-loch-ness-monster/index.json) - [Bundle manifest](/en/blogs/articles/2013/12/15/international-policy-coordination-the-loch-ness-monster/bundle-manifest.json) ## Bibliographic details - Authors: Olivier Blanchard, Jonathan D Ostry, Atish Rex Ghosh - Published: December 15, 2013 --- ### Observed pattern of international policy coordination - Coordination is "much discussed but rarely seen." - Coordination efforts have been episodic across decades, including the period between the Great Wars. - Coordination tends to occur "spontaneously in turbulent periods" when key players seek to avoid cascading negative spillovers. - In quieter times coordination is rarer, though historical examples include the Louvre and Plaza accords. ### Changes in cross-border spillovers and the policy environment - Views on the size of cross-border policy spillovers have evolved: literature in the 1980s often concluded effects were small, while "more recent evidence suggests that spillovers are sizable, reflecting the increase in trade and financial integration." - "Spillovers are generally larger in turbulent times." - Externalities reflect a paucity of policy instruments relative to targets, making it difficult or impossible for a country to inoculate itself against cross-border policy transmission. - If the number of instruments equals the number of targets, cooperative and non-cooperative outcomes will be the same, and there will be no gains from international coordination. - Legacy of the global financial crisis—"high public debt, near zero interest rates, and at times what looks like domestic political dysfunction"—suggests policymakers have fewer policy tools; in such circumstances gains from policy coordination across countries are likely to be larger than during the Great Moderation. ### Historical and crisis-era examples of coordination (and non-coordination) - Coordinated actions cited as beneficial: - The global fiscal stimulus enacted in the early days of the financial crisis is "generally seen to have raised global welfare." - Coordinated pursuit of tax havens (noted as an example) and the commitment to eschew protectionism and competitive depreciation to support aggregate demand. - Non-coordination example: - Major currency areas (U.S. Fed, European Central Bank, Bank of Japan) "did not coordinate their monetary expansions," despite likely large spillovers through trade and financial flows. ### Sources of failure to achieve coordination - Uncertainty and disagreement on the size and sign of cross-border effects make negotiation and sustaining coordinated outcomes harder. - Example: a monetary expansion can raise demand for exports in the rest of the world (positive spillover) but appreciate other currencies (negative spillover). - Source and recipient countries may differ on the size or sign of the net spillover. - Unconventional policy instruments increase uncertainty: "the policy instruments are unconventional and their effects less certain." - Other impediments discussed by Ostry and Ghosh include: - A lack of focus on domestic policy tradeoffs (necessary condition for successful coordination). - Inherent asymmetries in the global economy. ### Conditions that make coordination feasible - There must be "large and clear gaps between cooperating and not cooperating" to overcome the tendency of countries to act unilaterally. - It must be clear how each player can contribute to the global outcome. - Coordination is easier when "all players have to do the same thing" (for example, expand fiscal policy or refrain from competitive depreciations). - When quid pro quo arrangements are complex, coordination is more difficult and may not occur even if theoretical gains are large. ### Proposals and institutional roles - Role for a "neutral assessor" to clarify the nature of spillover effects and make cooperative outcomes easier to establish and sustain. - The IMF already plays a role as an assessor through country surveillance and, by recognizing increased interconnectedness, "it is playing a greater role in identifying spillovers." - The IMF can help identify policies "that would be in both the national and global interest." ### Potential policy tools and "rules of the road" - In some instances mutual gains from coordination may not exist—e.g., when a large country’s policies exert adverse spillovers across many smaller countries but smaller countries' actions do not affect the large country materially. - Guideposts or rules of the road (analogous to Bretton Woods rules against competitive depreciation) could help limit adverse spillovers. - Such guideposts could take the form of warnings or stronger measures when: - "current accounts deviate too much from current account norms," or - "some aspects of a country’s capital account become too unbalanced, contributing to credit or asset price boom-bust cycles abroad." ### Overall assessment and recommendations - International macro policy coordination will likely continue to be "heard about more often than it is seen." - Important obstacles exist to reaping coordination gains; to overcome them: - Identify circumstances when gains are likely to be large. - Push for specific coordinated outcomes in those cases. - When gains are not present, acknowledge that reality. - When large players cause significant adverse spillovers across many smaller countries, acknowledge this and consider feasible remedies. *International Policy Coordination: The Loch Ness Monster — Olivier Blanchard, Jonathan D. Ostry, Atish Rex Ghosh, December 15, 2013* --- ## Content in this bundle - **Staff Discussion Note** - [Staff Discussion Note (Markdown version)](/external/pubs/ft/sdn/2013/sdn1311.pdf.md){rel="alternate" type="text/markdown"} - [Staff Discussion Note (PDF)](/external/pubs/ft/sdn/2013/sdn1311.pdf){rel="external" type="application/pdf"} --- _Source: https://www.imf.org/en/blogs/articles/2013/12/15/international-policy-coordination-the-loch-ness-monster_