Journal Article

Grappling with global imbalances: when does international cooperation pay?

Paola Subacchi and Paul van den Noord

in Oxford Review of Economic Policy

Published on behalf of The Oxford Review of Economic Policy Ltd

Volume 28, issue 3, pages 444-468
Published in print January 2012 | ISSN: 0266-903X
Published online September 2012 | e-ISSN: 1460-2121 | DOI: http://dx.doi.org/10.1093/oxrep/grs022
Grappling with global imbalances: when does international cooperation pay?

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  • International Relations and International Political Economy
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This article assesses the circumstances under which countries agree to engage in policy cooperation. Assuming that each country aims to maximize its own welfare, we argue that cooperation needs to be necessary, feasible, and to produce a clearly superior outcome than unilateral action. Not every situation requires policy coordination. There are cases where unilateral and conventional policy measures achieve the necessary readjustment in a welfare-optimizing way. When rebalancing does not automatically happen and the resulting situation is a source of macroeconomic instability, and of welfare losses in the aggregate, internationally coordinated policy action could lead to solutions that generate a better outcome in terms of relative welfare. These solutions, however, are not necessarily stable and players should pre-commit to binding arrangements with sanctions for defection to ensure stability. We conclude that these pre-arrangements can only work if countries trust each other or they trust a supranational body that monitors the implementation of the arrangements and sanctions defection.

Keywords: exchange rates; global imbalances; capital flows; E52; F31; F59

Journal Article.  10728 words.  Illustrated.

Subjects: International Relations and International Political Economy ; Monetary Policy, Central Banking, and the Supply of Money and Credit ; International Finance

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