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January 1, 1989 eCONOMIC COMMeNTORY Federal Reserve Bank of Cleveland International Policy Coordination: Can We Afford It? byW. Lee Hoskins P olicymakers and economists today embrace the argument that increased openness among the world's economies justifies--if not necessitates--a closer coordination of nations' economic policies. Their automatic, almost unthinking, acceptance of this idea reflects both the undeniable fact that growing trade and capital flows now tightly link the world's markets and an unwavering association of words like cooperation and coordination with images of harmony, peace, and prosperity. Only a fool would question the need for policy coordination, contend proponents of international cooperation. Are we not, after all, in the same boat, affected by each other's policies? We must pull together if we hope to progress. The matter is not quite so simple. In a rush to enumerate the possible benefits of cooperation, we have neglected to recognize some of the potential costs. For those of us who believe that free markets guarantee the highest possible standard of living, the words cooperation and coordination ring like euphemisms for collusion against market outcomes and sound a threat to a proven source of lasting prosperity. ISSN 0428-1276 My concerns stem most recently from attempts at, and continued calls for, close global coordination of macroeconomic policies, but my fears have roots in other international developments, including policies dealing with the international debt situation. To be sure, certain types of cooperation are beneficial--indeed essential--to the smooth functioning of markets, but ments, through cooperation, attempt to supplant markets avoid market discipline. As governoften and such, The globalization offers enormous of markets potential for in- ternational cooperation--a potential both to enhance markets and to supplant markets. We must not accept proposals for international policy coordination without a critical assessment of their potential costs as well as benefits. we should keep a wary eye on proposals for global cooperation. • The Function of Markets and the Role of Government Competitive markets are unique social machines that produce an efficient allocation of the world's resources and the highest possible standard of living. The price mechanism relays information to all components of the market, while the profit mechanism forces prices and costs to their minimum. Through these mechanisms, competitive markets foster a special type of economic cooperation, in which participants readily understand the objectives and in which markets maintain discipline quickly and without discrimination. This cooperation within markets rewards innovations and efficiencies and removes waste. It confers net benefits on participants in excess of what they could otherwise secure. Economists have recognized these qualities of open, competitive markets since the time of Adam Smith, and realize that the global scale of markets only serves to enhance them. Markets require an institutional Unlike the market, however, framework to reduce the inevitable frictions that will result as participants interact. In market econo- machinery mies, the institutional structure includes laws that guarantee property rights, including contracts, and laws that protect other rights of individuals. Moreover, a medium of exchange with reasonably predictable purchasing power can enhance the smooth functioning of the market mechanism. These institutions reduce transaction costs and allow markets to achieve economies of scale. The market machinery does not al- ways work perfectly, however. Sometimes markets do not fully internalize the benefits, costs, or risks associated with private activities to the responsible parties, or a "free rider" problem exists. Frequently, economic shocks, starting in one market, can disrupt a wide range of economic activity as they ripple throughout the economy. Sometimes the nature of goods or the characteristics of production confer monopoly powers on individuals. At other times, we make adjustments to the market, sacrificing efficiency, to correct for inherent inequities among individuals. The need to create an institutional framework, and at times to adjust the market machinery, provides a role for governments in market economies. International cooperation can enhance this role in a closely integrated, global market. Government intervention, whether singular or cooperative, can guide an economy toward its ultimate objective of maintaining the highest standard of living when it enhances the functioning of private markets and when it dampens the transmission of severe, disruptive economic shocks. of government the includes no automatic mechanisms for maximizing output and minimizing costs. Rather than promoting efficiency and improving this important social engine, governments often slow and impede the market's proper function. We have come to recognize problems with governmental intervention in markets at the national level, but we often seem unwilling to accept that government intervention at the international level can impede the functioning of global markets just as easily. • Government Versus Market Objectives Students of government dismiss the view that elected officials seek to maximize the common good. Policymakers, in their own selfinterest, promote the desires of their constituencies, which often • Interdependence and the Benefits of Global Coordination The current perceived need for global policy coordination stems from evidence that markets for goods, services, and capital are now more open, or globally integrated, than in the past.' Advances in transportation and in communications have increased the degree of international openness by making production and distribution on a global scale more feasible.f The liberalization of trade and capital movements has permitted producers and investors vantage of these trade flows have to GNP in nearly to take fuller adadvances. Indeed, increased relative all major devel- oped countries, and capital flows can be a large proportion of national savings and Investment.' conflict with market outcomes. The world economy today is tied in a Greater openness has enhanced economic interdependence among nations. Changes in economic variables in one country have a more immediate, stronger influence on economic variables in another. A web of tariffs, taxes, subsidies, and regulation that, more often than tendency to underestimate the growing importance of interdependent not, lacks purpose other than to secure rents for certain influential segments of society. markets has caused surprises This tendency of elected govern- ment officials to define the good in terms of their own interest and the interests of constituencies should cause common selftheir us to question all government policies. Do these policies strengthen the institutional framework that enhances the market's performance? Do they recent tal, for pected deficits United in years. Inflows of foreign capiexample, lessened the eximpact of large budget on real interest rates in the States. A concern most often cited by advocates of coordinated macroeconomic policies is that global interdependence has increased the risks of systemic failure. This term eludes precise definition, but it implies a complete collapse of the financial provide adjustments to the market that help secure a high, sustainable standard of living? Or, alternatively, do these policies serve to supplant well-functioning markets with administrative and regulatory system and currency markets, emanating from the actions of only one country or events in a single market. In an integrated world mechanisms that interfere with market discipline and market performance at the expense of real economic growth? might not be able to insulate themselves against such contagion and its enormous costs. economy, individual countries Observers often point to two recent Proponents of global policy coor- events as evidence of the increased risks of systemic failure. One is the international debt crisis, which gained wide recognition in late dination argue that because of increased economic integration, the chances of achieving substantial benefits through mutual coopera- 1982. The debt crisis threatened not only large banks, but also many midsized regional banks and small banks through their lending ar- tion are greater now than at any other time. In many respects, they are correct. The potential benefits from the mutual reduction of trade rangements with debtor countries and through their domestic and international correspondent-banking relationships. The repercussions of restraints and from the further liberalization of capital movements undoubtedly grow as markets expand. widespread defaults could have had serious global implications. The stock-market collapse of October 19, 1987 offers a second, more recent, example of the risks of systemic failure. This collapse spread rapidly through stock markets around the world, posing a threat I applaud such market-enhancing international cooperation as GATT and the U.S.-Canadian Free Trade Agreement." The removal of artificial restraints on markets can increase the standard of living worldwide. Moreover, one cannot deny the value of shared information, to global economic growth and stability. Although unscathed from these recent experiences, the world remains vulnerable to similar types common purpose, and coordinated efforts during those rare periods of clear economic crisis. In today's economic environment, such shocks can ripple through markets quickly of events. and forcefully. In listing the arguments for closer international policy coordination, I also should note that this global in- In contrast to these efforts, many of the recent proposals for global policy cooperation call for a detailed harmonization--a fine tuning on a grand scale--of monetary, fiscal, and terdependence, which complicates economic interactions and increases the risks of systemic failure, often serves to discipline policymakers. regulatory developed Nations that have adopted inflationary policies have seen the market's disapproval quickly reflected in capital flows, in exchange-rate ings of the Group of Seven (G7) countries, for example, have focused on developing a set of "objective indicators"--including un- movements and, with some delay, in trade patterns. Similarly, the increased ease with which manufacturing and financial firms can move employment, inflation, currentaccount balances, exchange rates, and money growth--that could trigger policy changes in participant about the globe places a check on regulation and taxation. Simply stated, greater international interdependence increases the oppor- countries. Others have recommended target-zone arrangements or fixed-exchange-rate regimes, which presuppose a willingness to tunities for investors and traders to protect their wealth from the misguided policies of individual countries. coordinate basic macroeconomic policies closely? Some advocates of coordination have sought solutions for the international-debt situation that involve greatly expanded roles for governments and quasigovernmental international organizations. policies among the major countries. Recent meet- • Market Adjustments and the Costs of Cooperation The evolving importance of globally integrated markets creates both the enormous potential for nations to benefit from cooperation and the great danger that such cooperation could entail substantial costs by subverting markets for political ends. Consider, for example, recent allegations that the G7 countries are relying on a loose system of reference zones for exchange rates and on a set of economic indicators to guide their decisions about the compatibility of macroeconomic policies and about the appropriateness of adjustments. One can find little concrete evidence that these reference zones and indicators actually have influenced macroeconomic decisions in the separate G7 countries. This judgment might not be entirely fair. The G7 has never announced a complete set of "indicators" along with their relative weights in policy discussions, nor has it revealed reference zones for exchange rates. Furthermore, we do not know what policy would otherwise have been. To date, most of the cooperative efforts have attempted to stabilize exchange rates; the industrialized countries have not focused their attack on the fundamental problems underlying their current-account imbalances. Under the guise of cooperation and exchange-rate stabilization, the United States and the other major industrialized countries have financed a growing share of the U.S. current-account deficit through official reserve flows. While some might contend that this slowed the adjustment process to a manageable pace, one could argue just as forcefully that this official financing has avoided the adjustments that the exchange market ultimately will demand--specifically, Markets require an institutional Unlike the market, however, framework to reduce the inevitable frictions that will result as participants interact. In market econo- machinery mies, the institutional structure includes laws that guarantee property rights, including contracts, and laws that protect other rights of individuals. Moreover, a medium of exchange with reasonably predictable purchasing power can enhance the smooth functioning of the market mechanism. These institutions reduce transaction costs and allow markets to achieve economies of scale. The market machinery does not al- ways work perfectly, however. Sometimes markets do not fully internalize the benefits, costs, or risks associated with private activities to the responsible parties, or a "free rider" problem exists. Frequently, economic shocks, starting in one market, can disrupt a wide range of economic activity as they ripple throughout the economy. Sometimes the nature of goods or the characteristics of production confer monopoly powers on individuals. At other times, we make adjustments to the market, sacrificing efficiency, to correct for inherent inequities among individuals. The need to create an institutional framework, and at times to adjust the market machinery, provides a role for governments in market economies. International cooperation can enhance this role in a closely integrated, global market. Government intervention, whether singular or cooperative, can guide an economy toward its ultimate objective of maintaining the highest standard of living when it enhances the functioning of private markets and when it dampens the transmission of severe, disruptive economic shocks. of government the includes no automatic mechanisms for maximizing output and minimizing costs. Rather than promoting efficiency and improving this important social engine, governments often slow and impede the market's proper function. We have come to recognize problems with governmental intervention in markets at the national level, but we often seem unwilling to accept that government intervention at the international level can impede the functioning of global markets just as easily. • Government Versus Market Objectives Students of government dismiss the view that elected officials seek to maximize the common good. Policymakers, in their own selfinterest, promote the desires of their constituencies, which often • Interdependence and the Benefits of Global Coordination The current perceived need for global policy coordination stems from evidence that markets for goods, services, and capital are now more open, or globally integrated, than in the past.' Advances in transportation and in communications have increased the degree of international openness by making production and distribution on a global scale more feasible.f The liberalization of trade and capital movements has permitted producers and investors vantage of these trade flows have to GNP in nearly to take fuller adadvances. Indeed, increased relative all major devel- oped countries, and capital flows can be a large proportion of national savings and Investment.' conflict with market outcomes. The world economy today is tied in a Greater openness has enhanced economic interdependence among nations. Changes in economic variables in one country have a more immediate, stronger influence on economic variables in another. A web of tariffs, taxes, subsidies, and regulation that, more often than tendency to underestimate the growing importance of interdependent not, lacks purpose other than to secure rents for certain influential segments of society. markets has caused surprises This tendency of elected govern- ment officials to define the good in terms of their own interest and the interests of constituencies should cause common selftheir us to question all government policies. Do these policies strengthen the institutional framework that enhances the market's performance? Do they recent tal, for pected deficits United in years. Inflows of foreign capiexample, lessened the eximpact of large budget on real interest rates in the States. A concern most often cited by advocates of coordinated macroeconomic policies is that global interdependence has increased the risks of systemic failure. This term eludes precise definition, but it implies a complete collapse of the financial provide adjustments to the market that help secure a high, sustainable standard of living? Or, alternatively, do these policies serve to supplant well-functioning markets with administrative and regulatory system and currency markets, emanating from the actions of only one country or events in a single market. In an integrated world mechanisms that interfere with market discipline and market performance at the expense of real economic growth? might not be able to insulate themselves against such contagion and its enormous costs. economy, individual countries Observers often point to two recent Proponents of global policy coor- events as evidence of the increased risks of systemic failure. One is the international debt crisis, which gained wide recognition in late dination argue that because of increased economic integration, the chances of achieving substantial benefits through mutual coopera- 1982. The debt crisis threatened not only large banks, but also many midsized regional banks and small banks through their lending ar- tion are greater now than at any other time. In many respects, they are correct. The potential benefits from the mutual reduction of trade rangements with debtor countries and through their domestic and international correspondent-banking relationships. The repercussions of restraints and from the further liberalization of capital movements undoubtedly grow as markets expand. widespread defaults could have had serious global implications. The stock-market collapse of October 19, 1987 offers a second, more recent, example of the risks of systemic failure. This collapse spread rapidly through stock markets around the world, posing a threat I applaud such market-enhancing international cooperation as GATT and the U.S.-Canadian Free Trade Agreement." The removal of artificial restraints on markets can increase the standard of living worldwide. Moreover, one cannot deny the value of shared information, to global economic growth and stability. Although unscathed from these recent experiences, the world remains vulnerable to similar types common purpose, and coordinated efforts during those rare periods of clear economic crisis. In today's economic environment, such shocks can ripple through markets quickly of events. and forcefully. In listing the arguments for closer international policy coordination, I also should note that this global in- In contrast to these efforts, many of the recent proposals for global policy cooperation call for a detailed harmonization--a fine tuning on a grand scale--of monetary, fiscal, and terdependence, which complicates economic interactions and increases the risks of systemic failure, often serves to discipline policymakers. regulatory developed Nations that have adopted inflationary policies have seen the market's disapproval quickly reflected in capital flows, in exchange-rate ings of the Group of Seven (G7) countries, for example, have focused on developing a set of "objective indicators"--including un- movements and, with some delay, in trade patterns. Similarly, the increased ease with which manufacturing and financial firms can move employment, inflation, currentaccount balances, exchange rates, and money growth--that could trigger policy changes in participant about the globe places a check on regulation and taxation. Simply stated, greater international interdependence increases the oppor- countries. Others have recommended target-zone arrangements or fixed-exchange-rate regimes, which presuppose a willingness to tunities for investors and traders to protect their wealth from the misguided policies of individual countries. coordinate basic macroeconomic policies closely? Some advocates of coordination have sought solutions for the international-debt situation that involve greatly expanded roles for governments and quasigovernmental international organizations. policies among the major countries. Recent meet- • Market Adjustments and the Costs of Cooperation The evolving importance of globally integrated markets creates both the enormous potential for nations to benefit from cooperation and the great danger that such cooperation could entail substantial costs by subverting markets for political ends. Consider, for example, recent allegations that the G7 countries are relying on a loose system of reference zones for exchange rates and on a set of economic indicators to guide their decisions about the compatibility of macroeconomic policies and about the appropriateness of adjustments. One can find little concrete evidence that these reference zones and indicators actually have influenced macroeconomic decisions in the separate G7 countries. This judgment might not be entirely fair. The G7 has never announced a complete set of "indicators" along with their relative weights in policy discussions, nor has it revealed reference zones for exchange rates. Furthermore, we do not know what policy would otherwise have been. To date, most of the cooperative efforts have attempted to stabilize exchange rates; the industrialized countries have not focused their attack on the fundamental problems underlying their current-account imbalances. Under the guise of cooperation and exchange-rate stabilization, the United States and the other major industrialized countries have financed a growing share of the U.S. current-account deficit through official reserve flows. While some might contend that this slowed the adjustment process to a manageable pace, one could argue just as forcefully that this official financing has avoided the adjustments that the exchange market ultimately will demand--specifically, an increase in U.S. private savings and a substantial reduction in the U.S. budget deficit. I doubt that cooperation has led countries to adopt markedly better policies, or that it has reduced exchangemarket uncertainty. Failing this, it has imposed substantial costs. Similar arguments apply to the developing-country-debt situation. To be sure, quick U.S. actions in providing bridge loans helped to avoid outright defaults in some in- market participants base decisions, in part, on the expected actions of governments. When future policies are uncertain, market participants atby avoiding actions that might leave them vulnerable to policy changes. Recent proposals for detailed international policy coordination could legendary. If economists cannot agree on how the economy works, can we expect governments to agree on and implement coor- actually increase uncertainties, if they create doubt about the willingness and ability of governments to dinated, effective macroeconomic policies? One also might wonder about the outcome if the world implement cooperated, but adopted the wrong model of how the world works. them. Nations willingly cooperate when all benefit. Mutual gains most likely result when cooperation is narrow in scope, when the number of par- many debtor countries and to secure rescheduling agreements from banks. These actions reduced the risks of systemic failure. ticipants however, that this cooperation between debtor and creditor governments also has helped many banks to avoid the repricing of their assets, but has done little to ease. developing countries' debt burdens or to foster a lasting adjustment in debtor countries. Substantiating this appraisal, developing-country debts trade far below their book values in secondary markets, as does the stock of among tempt to hedge by raising prices or stances, and the cooperative efforts of governments and of the International Monetary Fund helped to initiate adjustment programs in Many have argued, can. The sharp differences economists about the true state of the economy, and about the interrelationships among policy levers and economic variables, are almost is small, and when the This, of course, is a problem at the national level, but international cooperation could greatly increase 6 the costs of an error. resulting policies promote the smooth functioning of markets. Bilateral trade agreements are an ex- Many of the proposals for detailed international coordination remind me of policymakers' "fine tuning" ef- ample. When cooperation is more complex, however, as in the case of macroeconomic policy coordination, success often requires that forts of the 1960s and 1970s, when they attempted to achieve many targets Simultaneously. The thrust of policies shifted frequently, and countries take actions contrary to some of their individual interests. Compliance then entails burdens, which countries historically have attempted to avoid or to shift. those policies generally missed on all accounts. The markets' mistrust of policymakers was reflected in an inflationary psychology that compli- Consider our experiences with macroeconomic policy coordination cated and extended the fight against inflation. If we now make domestic objectives subject to international targets and events, since 1985. In light of the sparse U.S. progress toward lowering our budget deficits, our part of the bargain, one could argue that the dollar's depreciation has shifted more economic agents once again could lose confidence in the willingness and the ability of policymakers to pursue important domestic goals. for uninterrupted debt service and probably have increased the overall real-resource costs of adjustment. of the adjustment burden onto our trading partners--an outcome that was not completely the result of international coordination and coop- • Conclusion Governments obviously play an essential role in a market economy. • Coordination and the Costs of Uncertainty In addition to the potentially large real-resource costs, which I have thus far attributed to the tendency eration. Because international policy coordination--unlike markets-often lacks a credible system for enforcement and burden-sharing, it That markets today extend across national boundaries does not alter this role; indeed, global markets enhance it. We should explore oppor- can create uncertainties extent of compliances. tunities for international cooperation that enhance the performance of markets and reduce the risks of systemic failure, but we must con- highly exposed banks in equity markets. These policies have not significantly reduced uncertainties associated with the long-term prospects of governments to supplant mar- kets, international coordination could create additional costs by generating market uncertainty. Private about the Even if nations are willing to coordinate broad policy objectives, many observers doubt that they sider both the benefits and costs of such policies. Many have advocated a greatly ex- panded role for international policy coordination. They argue that as markets become increasingly integrated, the potential benefits from such coordination become enormous. I caution that such policies often seek to supplant markets and to avoid market discipline, risking enormous costs in terms of real economic growth and efficiency. Much of the current thrust toward global cooperation is concerned with macroeconomic policy coordination. Given the political and economic realities of the world • Footnotes 1. A perceived need for policy coordina- tion is not new. For a discussion of central-bank cooperation in the 1920s, Reserve Bank of New York, 1967. 2. For a discussion world integration, of factors increasing Amsterdam: North-Holland nomic Interdependence 4. Through New 1988): zero inflation and long-term real growth potential. This would not tional Economics, No.5. Washington, D.C.: Institute for International stabilize exchange rates, but it would remove much of the uncer- Ronald McKinnon, Economics, Paul R. Watro on Trade 5. See John Williamson, "The Exchange Rate System," Policy Analyses in Interna- lateral reductions 2/15/88 The Bank Credit-Card Boom: Some Explanations and Consequences rounds of negotia- and Tariffs (GATT) has achieved 3/1/88 Federal Budget Deficits: Sources and Forecasts multi- in trade barriers. September John J. Erceg and Theodore G. Bernard 3/15/88 International Developments and Monetary Policy 1983. See also "Monetary and Ex- change Rate Policies for International Financial Stability: A Proposal." Journal 9/1/88 The Case for Zero Inflation Charles T. Carlstrom Review, Federal successive Gerald H. Anderson 2/1/88 Bank Runs, Deposit Insurance, and Bank Regulation, Part IT Nations: Reserve Bank of Boston (May/June 21-38. Randall W. Eberts and John R. Swinton Charles T. Carlstrom "Eco- between Intervention and the Dollar 1/15/88 Bank Runs, Deposit Insurance, and Bank Regulation, Part I 3. On the growth of trade and capital flows, see Norman S. Fieleke, Merchandise Trade and the Outlook for 1988 Douglas Dalenberg and Randall W. Eberts Publishing Instead, I would urge countries to adopt, to announce, and to steadfastly maintain long-term nominal targets for policy, consistent with be credible, predictable, and--most important--capable of maintaining the integrity of private markets. sociation of Business Economists in Denver, Colorado, on December 9, 1988. W. Lee Hoskins Economic Perspectives, vol. 2, no. 1 (Winter 1988): 83-103. 4/15/88 Stable Inflation Fosters Sound Economic Decisions James G. Hoehn William T. Gavin and Alan C. Stockman 9/15/88 How Are the Ex-ODGFThrifts Doing? 5/1/88 What's Happening to Labor Compensation? Paul R. Watro Erica 1. Groshen 10/1/88 5/15/88 Debt Repayment and Economic Adjustment Assessing and Resisting Inflation Gerald H. Anderson Owen F. Humpage 6/1/88 Measuring the Unseen: A Primer on Capacity Utilization Measures Paul W. Bauer and Mary E. Deily 6/15/88 A User's Guide to CapacityUtilization Measures 10/15/88 What's Happened to Ohio's Manufacturing Jobs? Randall W. Eberts 11/1/88 Productivity, Costs, and International Competitiveness John J. Erceg and Theodore Paul W. Bauer and Mary E. Deily 7/1/88 Three Common Misperceptions About Foreign Direct Investment Gerald H. Anderson 7/15/88 Humphrey-Hawkins: The July 1988 Monetary Policy Report G. Bernard 11/15/88 Commercial Lending of Ohio's S&Ls Gary Whalen 12/1/88 Service-Sector Wages: the Importance of Education John R. Swinton 12/15/88 8/1/88 Is the Thrift Performance Gap Widening? Evidence from Ohio 6. See Jeffrey A. Frankel and Katharine Rockett, "International Macroeconomic Policy Coordination When Policymakers Paul R. Watro 8/15/88 Do Not Agree on the True Model." American Economic Review, (June 1988): 318-340. Owen F. Humpage William T. Gavin and John N. McElravey 4/1/88 of Copies of the titles Has Manufacturing's Presence in the Economy Diminished? 1/1/88 Public Infrastructure and Economic Development Co. (1985): 1195-1234. tion, the General Agreement targets would is based to the Denver As- W. Jones and Peter B. Kenen, eds., Handbook of International Economics, Vol. 2. England Economic instituted Commentary on a speech presented and Coor- Reason for Policy Coordination?" dividually The material of Economic Policies." In Ronald detailed coordination of macroeconomic policies would not improve, but could very well jeopardize, our standard of living. nations compatible, and would provide a buffer to external policy errors and shocks. Such broad, in- in this Economic of the Federal see Richard N. Cooper, "Economic Interdependence dination Lee Hoskins is president Reserve Bank of Cleveland. 1924-31. New York: Federal today, I believe that a move toward tainty about future policy that contributes to exchange-rate volatility. Flexible exchange rates would adjust, making the plans of individual w: see Stephen V. O. Clarke, Central Bank Cooperation - Economic Commentary is a biweekly periodical published by the Federal Reserve Bank of Cleveland. listed below are available through the Public Information Department, 216/579-2157. vol. 78, no. 3 I j BULK RATE U.S. Postage Paid Cleveland, OH Permit No. 385 Federal Reserve Bank of Cleveland Research Department PO. Box 6387 Cleveland, OH 44101 I Material may be reprinted provided that the source is credited. Please send copies of reprinted materials to the editor. Address Correction Please send corrected Requested: mailing label to the Federal Reserve Bank of Cleveland, Research Department, P.o. Box 6387, Cleveland, OH 44101 Many have advocated a greatly ex- panded role for international policy coordination. They argue that as markets become increasingly integrated, the potential benefits from such coordination become enormous. I caution that such policies often seek to supplant markets and to avoid market discipline, risking enormous costs in terms of real economic growth and efficiency. Much of the current thrust toward global cooperation is concerned with macroeconomic policy coordination. Given the political and economic realities of the world • Footnotes 1. A perceived need for policy coordina- tion is not new. For a discussion of central-bank cooperation in the 1920s, Reserve Bank of New York, 1967. 2. For a discussion world integration, of factors increasing Amsterdam: North-Holland nomic Interdependence 4. Through New 1988): zero inflation and long-term real growth potential. This would not tional Economics, No.5. Washington, D.C.: Institute for International stabilize exchange rates, but it would remove much of the uncer- Ronald McKinnon, Economics, Paul R. Watro on Trade 5. See John Williamson, "The Exchange Rate System," Policy Analyses in Interna- lateral reductions 2/15/88 The Bank Credit-Card Boom: Some Explanations and Consequences rounds of negotia- and Tariffs (GATT) has achieved 3/1/88 Federal Budget Deficits: Sources and Forecasts multi- in trade barriers. September John J. Erceg and Theodore G. Bernard 3/15/88 International Developments and Monetary Policy 1983. See also "Monetary and Ex- change Rate Policies for International Financial Stability: A Proposal." Journal 9/1/88 The Case for Zero Inflation Charles T. Carlstrom Review, Federal successive Gerald H. Anderson 2/1/88 Bank Runs, Deposit Insurance, and Bank Regulation, Part IT Nations: Reserve Bank of Boston (May/June 21-38. Randall W. Eberts and John R. Swinton Charles T. Carlstrom "Eco- between Intervention and the Dollar 1/15/88 Bank Runs, Deposit Insurance, and Bank Regulation, Part I 3. On the growth of trade and capital flows, see Norman S. Fieleke, Merchandise Trade and the Outlook for 1988 Douglas Dalenberg and Randall W. Eberts Publishing Instead, I would urge countries to adopt, to announce, and to steadfastly maintain long-term nominal targets for policy, consistent with be credible, predictable, and--most important--capable of maintaining the integrity of private markets. sociation of Business Economists in Denver, Colorado, on December 9, 1988. W. Lee Hoskins Economic Perspectives, vol. 2, no. 1 (Winter 1988): 83-103. 4/15/88 Stable Inflation Fosters Sound Economic Decisions James G. Hoehn William T. Gavin and Alan C. Stockman 9/15/88 How Are the Ex-ODGFThrifts Doing? 5/1/88 What's Happening to Labor Compensation? Paul R. Watro Erica 1. Groshen 10/1/88 5/15/88 Debt Repayment and Economic Adjustment Assessing and Resisting Inflation Gerald H. Anderson Owen F. Humpage 6/1/88 Measuring the Unseen: A Primer on Capacity Utilization Measures Paul W. Bauer and Mary E. Deily 6/15/88 A User's Guide to CapacityUtilization Measures 10/15/88 What's Happened to Ohio's Manufacturing Jobs? Randall W. Eberts 11/1/88 Productivity, Costs, and International Competitiveness John J. Erceg and Theodore Paul W. Bauer and Mary E. Deily 7/1/88 Three Common Misperceptions About Foreign Direct Investment Gerald H. Anderson 7/15/88 Humphrey-Hawkins: The July 1988 Monetary Policy Report G. Bernard 11/15/88 Commercial Lending of Ohio's S&Ls Gary Whalen 12/1/88 Service-Sector Wages: the Importance of Education John R. Swinton 12/15/88 8/1/88 Is the Thrift Performance Gap Widening? Evidence from Ohio 6. See Jeffrey A. Frankel and Katharine Rockett, "International Macroeconomic Policy Coordination When Policymakers Paul R. Watro 8/15/88 Do Not Agree on the True Model." American Economic Review, (June 1988): 318-340. Owen F. Humpage William T. Gavin and John N. McElravey 4/1/88 of Copies of the titles Has Manufacturing's Presence in the Economy Diminished? 1/1/88 Public Infrastructure and Economic Development Co. (1985): 1195-1234. tion, the General Agreement targets would is based to the Denver As- W. Jones and Peter B. Kenen, eds., Handbook of International Economics, Vol. 2. England Economic instituted Commentary on a speech presented and Coor- Reason for Policy Coordination?" dividually The material of Economic Policies." In Ronald detailed coordination of macroeconomic policies would not improve, but could very well jeopardize, our standard of living. nations compatible, and would provide a buffer to external policy errors and shocks. Such broad, in- in this Economic of the Federal see Richard N. Cooper, "Economic Interdependence dination Lee Hoskins is president Reserve Bank of Cleveland. 1924-31. New York: Federal today, I believe that a move toward tainty about future policy that contributes to exchange-rate volatility. Flexible exchange rates would adjust, making the plans of individual w: see Stephen V. O. Clarke, Central Bank Cooperation - Economic Commentary is a biweekly periodical published by the Federal Reserve Bank of Cleveland. listed below are available through the Public Information Department, 216/579-2157. vol. 78, no. 3 I j BULK RATE U.S. Postage Paid Cleveland, OH Permit No. 385 Federal Reserve Bank of Cleveland Research Department PO. Box 6387 Cleveland, OH 44101 I Material may be reprinted provided that the source is credited. Please send copies of reprinted materials to the editor. Address Correction Please send corrected Requested: mailing label to the Federal Reserve Bank of Cleveland, Research Department, P.o. Box 6387, Cleveland, OH 44101
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