Currency Wars or Efficient Spillovers? A General Theory of International Policy Cooperation

February 10, 2017

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Format: Chicago

Anton Korinek. Currency Wars or Efficient Spillovers? A General Theory of International Policy Cooperation, (USA: International Monetary Fund, 2017) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

In an interconnected world, national economic policies regularly lead to large international spillover effects, which frequently trigger calls for international policy cooperation. However, the premise of successful cooperation is that there is a Pareto inefficiency, i.e. if there is scope to make some nations better off without hurting others. This paper presents a first welfare theorem for open economies that defines an efficient benchmark and spells out the conditions that need to be violated to generate inefficiency and scope for cooperation. These are: (i) policymakers act competitively in the international market, (ii) policymakers have sufficient external policy instruments and (iii) international markets are free of imperfections. Our theorem holds even if each economy suffers from a wide range of domestic market imperfections and targeting problems. We provide examples of current account intervention, monetary policy, fiscal policy, macroprudential policy/capital controls, and exchange rate management and show that the resulting spillovers are Pareto efficient, as long as the three conditions are satisfied. Furthermore, we develop general guidelines for how policy cooperation can improve welfare when the conditions are violated.

Subject: Consumption, Exports, Financial sector policy and analysis, Imports, International cooperation, International organization, International trade, National accounts, Spillovers

Keywords: Consumption, Currency wars, Exports, First welfare theorem, Global, Implementation cost, Imports, International cooperation, International policy cooperation, Market power, Mis-targeting problem, Net exporter, Price vector, Spillovers, Utility function, WP

Publication Details

Pages:

66
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/025
Stock No:

WPIEA2017025
ISBN:

9781475577549
ISSN:

1018-5941

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