4 Policy Coordination with Model Uncertainty
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund
  • | 2 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

Abstract

The design and desirability of rules for the international coordination of macroeconomic policies in a world characterized by model uncertainty are considered. The presence of model uncertainty provides additional incentive to coordinate policies, provided that policymakers recognize that they cannot know the true model. To quantify the benefits from coordination, confidence regions are specified for parameters in MINIMOD; policymakers in the United States and the rest of the world are assumed to use these ranges as subjective probability priors. It is shown that the expected value of gains from coordination of policies may be large, despite substantial parameter uncertainty.