The Elusive Quest for International Policy Cooperation
IMF Blog, March 26, 2015
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Bibliographic details
- Authors: Olivier Blanchard, Mahvash S Qureshi, Atish Rex Ghosh
- Published: March 26, 2015
Overview
- Publication: The Elusive Quest for International Policy Cooperation
- Authors: Olivier Blanchard, Mahvash S. Qureshi, Atish Rex Ghosh
- Date: March 26, 2015
- Central metaphor: International policy cooperation compared to "Nessie, the lovable Loch Ness monster": oft-discussed, seldom seen.
Definitions and degrees of "cooperation"
- Cooperation can mean different things:
- Explaining the logic of domestic policy actions to others — transparency (notably by central banks).
- Creation of multilateral institutions and arrangements — e.g., central bank swap lines and new IMF liquidity provision facilities set up after the global financial crisis.
- Setting and following well-defined "rules of the road" — largely absent since the breakdown of the Bretton Woods system; existing principles are too vague and undermined by conceptual disagreements (example: determining equilibrium exchange rates and how far is "too far").
- Economists' preferred meaning: moving from the Nash to the coordinated equilibrium — the highest degree of cooperation.
- Historical coordinated episodes (few sightings of Nessie in the past forty years):
- Bonn
- Plaza
- Louvre
- Group of Twenty fiscal stimulus in the wake of the global financial crisis
Five key insights from the IMF panel discussion
- Constants in a changing world
- Core challenges persistent across decades: facilitating external adjustment; ensuring an equitable burden of adjustment between surplus and deficit countries; regulating the supply of global liquidity.
- These challenges have magnified with increased financial integration, growing volume of private capital flows, and emergence of complex financial systems prone to excesses.
- Misaligned incentives
- Countries coordinate when they are "scared together"; incentives to coordinate fade once immediate threat recedes.
- Coordination is easier when countries move policies that would be individually in their self-interest regardless of others, albeit with potentially greater collective benefit if acting together.
- Coordination is harder when it requires governments to implement policies that depart from their unilateral choices and only make sense if all parties deliver on commitments.
- Examples: Group of Twenty coordinated fiscal expansions during the global financial crisis; agreement on financial sector regulation such as the Basel agreements.
- Net and gross
- Coordination has typically followed when net flow imbalances and exchange rate misalignments were apparent.
- Important vulnerabilities can build up from gross positions long before net imbalances become visible—through cross-border bank flows and oversized banking systems.
- Stretching the truth
- Deliberate disagreements about cross-border multipliers are a major obstacle to coordination, beyond genuine uncertainty.
- A respected third party providing unbiased analysis of domestic and cross-border effects—a "neutral assessor"—could help build consensus.
- Whether the IMF could serve as that neutral assessor is an open question; improved analysis of cross-border spillovers is recommended.
- Keep it simple
- Given coordination obstacles, simple "rules of the road" indicators (for example, based on reserves accumulation or current account balances) may be more effective than attempting theoretically-optimal, tailor-made cooperative solutions.
- Analogous to the "Volcker Rule" in domestic finance.
- Questions remain about how simple such rules should be and, especially for sovereigns, how to enforce them.
Policy implications and next steps
- Recognize formidable obstacles to international policy cooperation, including domestic institutional frictions (e.g., cooperation among monetary, fiscal, and macroprudential authorities).
- Historical parallels: global cooperation in international health and trade progressed over decades through building technical and political consensus.
- Recommended direction:
- Be persistent and build on existing institutions and modalities, such as the IMF's Integrated Surveillance Decision and multilateral surveillance products.
- Improve analysis of cross-border spillovers and consider the role of a neutral assessor to reduce deliberate disagreement about multipliers.
- Pursue practical, simple "rules of the road" to secure superior outcomes, while addressing questions of design and enforcement.
- Conclusion: Not likely to spot Nessie any time soon, but efforts to find her continue.
Olivier Blanchard, Mahvash S. Qureshi, Atish Rex Ghosh; March 26, 2015 — https://www.imf.org/en/blogs/articles/2015/03/26/the-elusive-quest-for-international-policy-cooperation
Content in this bundle
- Staff Discussion Note