Explain the possible reasons for and benefits of international macroeconomic policy coordination. What are two different reasons why we actually see little international macroeconomic policy coordination?

Question

What will be an ideal response?

Answer 1

POSSIBLE RESPONSE: The policies adopted by one country can have detrimental effects on other countries. A shift to expansionary monetary policy causes the currencies of other countries to appreciate, decreasing the international competitiveness of these countries. This can be seen as a form of beggar-thy-neighbor policy where a country deliberately makes itself better off at the expense of other countries. Or, a country may fail to make a policy change whose benefits mostly go to other countries. If all countries act jointly to make a policy change all would reap substantial benefits. During the 1987 stock market crash if one country acted alone to increase liquidity, the rest would benefit by more than the individual country alone. Acting alone, individual countries would be slow to react. Fortunately, in 1987 all countries acted jointly and the liquidity crisis was averted. We do see little explicit international policy coordination. There are two major reasons. First, the goals of different countries may not be compatible. Second, the actual benefits of international policy coordination may be small in many situations.