## The Elusive Quest for International Policy Cooperation _IMF Blog, March 26, 2015_ ## Source details **Canonical URL:** [The Elusive Quest for International Policy Cooperation](https://www.imf.org/en/blogs/articles/2015/03/26/the-elusive-quest-for-international-policy-cooperation) ## Other formats - [Markdown version](/en/blogs/articles/2015/03/26/the-elusive-quest-for-international-policy-cooperation/index.md) - [Structured JSON version](/en/blogs/articles/2015/03/26/the-elusive-quest-for-international-policy-cooperation/index.json) - [Bundle manifest](/en/blogs/articles/2015/03/26/the-elusive-quest-for-international-policy-cooperation/bundle-manifest.json) ## 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** - [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"} --- ## References - [Loch Ness monster](http://blogs.imf.org/2013/12/15/international-policy-coordination-the-loch-ness-monster/) - [gross positions](http://www.imf.org/external/pubs/ft/fandd/2015/03/white.htm) - [Integrated Surveillance Decision](http://www.imf.org/external/np/exr/facts/isd.htm) _Source: https://www.imf.org/en/blogs/articles/2015/03/26/the-elusive-quest-for-international-policy-cooperation_