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Coordinating macroeconomic policy

The concept of macroeconomic policy coordination has been around for decades, and was created with the recognition that policy in one country creates externalities in other countries. For example, macroeconomic policy coordination feeds into stabilization of exchange rates, since differences may lead speculators to pull money out of one country and place it in another. Monetary policy coordination that changes interest rates among countries in tandem can halt this type of speculation (Blecker 1999). Fiscal policy coordination can be used to ensure fiscal discipline of coordinating countries to control inflation (Eggertsson 2006) and reinforce monetary policy coordination.

There are small gains (between 0.5 and 1 percent of GDP) to macroeconomic policy coordination (Oudiz and Sachs 1984). This is the generally accepted quantification of gains from policy coordination for developed countries; developing countries may experience higher gains (Meyer et al. 2002).

Policy coordination in practice has been difficult to achieve. The first attempt at macroeconomic policy coordination occurred in 1973 in the face of the oil price shock. Countries experienced higher inflation and devaluation, and countries were poised to engage in monetary tightening. Coordination did not occur at this time, but a conversation among the Group of Five (G-5) resulted in creation of an oil facility as an alternative to fiscal tightening (Meyer et al. 2002). Serious attempts at policy coordination ended after the failure of a coordination in 1978 that was interrupted by the second oil shock in 1979, and by the election of Ronald Reagan in the US and Margaret Thatcher in the United Kingdom (UK) in the 1980s, who were generally opposed to coordinated policy maneuvers. Policy coordination was attempted in 1985 under the Plaza Accord, and in 1987 under the Louvre Accord, but neither implementation was particularly effective (Meyer et al. 2002).

Policy making at the national level once again became the norm. Fiscal policy was seen as a less effective tool for economic fine-tuning. Even more generally, officials particularly in the United States felt, after the failure of the Plaza and Louvre accords, that coordinated policy making was not worthwhile (Sobel and Stedman 2006).

After the Asian financial crisis, however, global coordination was again discussed. The Financial Stability Forum was created to bring finance officials, regulators, and central bank officials together to discuss financial stability, even if this was not a forum for coordinated policy making per se. After the Great Recession of 2008, the Financial Stability Forum was regrouped as the Financial Stability Board.

Academics and officials alike desired global macroeconomic policy coordination in the wake of the US crisis, but this was not accomplished as G-20 leaders met in April 2009. The most recent crisis reinforced the importance of using regular automatic stabilizers in the case of any recession, since once a crisis begins, discretionary fiscal spending comes too late (Claessens et al. 2010). Macroeconomic policy coordination among regions at least is desirable to provide countercyclical fiscal stimulus (Takagi 2009) while preventing cross-border shifts in deposits and other destabilizing effects, but it has not gotten any easier, as individual countries find it difficult to make concessions to others (Jones 2009).

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