Chapter 3 Empirical Evidence of Effects of Policy Coordination Among Major Industrial Countries Since Rambouillet Summit of 1975
Author: Wilfried Guth1
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

Abstract

The past few years have seen renewed efforts at macroeconomic policy coordination among the major industrial countries, and the global turbulences on the equities and exchange markets in late 1987 have increased demands for improving coordination. The expected benefits are based on theoretical analyses of the advantages of cooperative policies compared with the results of noncooperative policies, though the outcome is ambiguous. In these circumstances, academic research has increasingly been aimed at furnishing empirical evidence for the conditions, the possible welfare gains and losses, and the limits of macroeconomic policy coordination.

Günter GroBer

The past few years have seen renewed efforts at macroeconomic policy coordination among the major industrial countries, and the global turbulences on the equities and exchange markets in late 1987 have increased demands for improving coordination. The expected benefits are based on theoretical analyses of the advantages of cooperative policies compared with the results of noncooperative policies, though the outcome is ambiguous. In these circumstances, academic research has increasingly been aimed at furnishing empirical evidence for the conditions, the possible welfare gains and losses, and the limits of macroeconomic policy coordination.

Economic cooperation among industrial countries is exercised in many forms, extending from the mere exchange of information up to joint action.1 In this hierarchy, policy coordination is tantamount to a rather intensive engagement by participating countries. In the academic literature it has been precisely defined as “the agreement by two or more countries to a cooperative set of policy changes, where neither would wish to undertake the policy change on its own, but where each expects the package to leave it better off relative to the Nash non-cooperative equilibrium, in which each sets its policies taking the other’s as given.”2 A typical agreement of this kind is the focus of this paper—the ad hoc coordination of macroeconomic policies among interested parties.3

The rise of international policy coordination as a new instrument was promoted by the transition to a regime of flexible exchange rates in the first half of the 1970s. Enlarged room for discretionary national action had increased external uncertainty, and concern about inconsistent policies was an important background for the first economic summit conference in 1975, when inflation and balance of payments disequilibria had upset the world economy. The subsequent annual meetings of the heads of governments of the seven major industrial countries became the most conspicuous setting for economic cooperation, though the execution of policy coordination was recently delegated to the Group of Five or Seven level. These activities are highly interrelated with the work of other institutions, such as the Group of Ten, the Interim Committee, and also the International Monetary Fund itself. Another important forum for economic cooperation among industrial countries is the Organization for Economic Cooperation and Development (OECD). Here again, the summit countries play a leading role in the discussion of appropriate economic policies. However, larger countries prefer to consult about possible changes in targets and policies in smaller groups.4

Apart from worldwide coordination efforts by major industrial countries, the European Community reflects a regional approach. However, even the elaborate proposal of “a cooperative growth strategy for more employment” submitted by the European Commission in November 1985 did not bring forward effective macroeconomic policy coordination among member countries. Against this, the European Monetary System (EMS) is an important example of institutionalized coordination, although not all Community members participate in the exchange rate mechanism.5

On the whole there is a very broad spectrum of economic cooperation among major industrial countries. The following analysis will differentiate between the few cases of policy coordination among major industrial countries and the overwhelming number of less intensive forms of cooperation; policy activities in participating countries will be compared with agreed policies. The empirical evidence for the effects of policy coordination will then be discussed.

Policy Coordination Since Mid-1970s

The loss of the reins for discretionary national decision making inherent in the Bretton Woods exchange rate system turned out to be an important stimulus to international economic cooperation. A second stimulus was the poor economic performance of industrial countries after the 1974–75 recession. In the wake of the first oil price hike, persistent inflationary pressure combined with stubbornly high unemployment was a new experience for economic policy. When the United States succeeded in pushing growth up to pre-crisis levels, but not Japan and Western Europe, current account disequilibria and weakness of the dollar gave evidence of external disorder. This situation alone was fertile soil for the idea of cooperative policy efforts by major countries. Important features of this constellation of circumstances reappeared in the mid-1980s when the consequences of divergent policies and divergent growth performance of the United States on the one hand and Japan and Western Europe on the other confronted economic policymakers with the challenge of reconciling the urgent reduction of external imbalances with, at least, the continuation of the moderate growth achieved.

Forums for Policy Coordination

The main forums for ad hoc coordination of macroeconomic policies have been the economic summits of the heads of government and the Group of Five or Seven meetings of the ministers of finance and central bank governors. Originally, the objective of economic summits was an intense discussion of urgent problems rather than the elaboration of economic action programs. However, the critical situation of the world economy in the mid-1970s induced participants from the beginning to use common declarations to support confidence worldwide. Before long, the discussion on important policy issues led to aspirations to influence policy actions.

Ad hoc coordination of macroeconomic policies was exercised first at the 1978 Bonn Summit. After a pause of several years in the wake of the second oil price hike, similar endeavors started again in the 1980s. Activities were concentrated in the Group of Five and, since 1986, in the Group of Seven, which were entrusted with the task “to work together more closely and more frequently in the periods between the annual Summit meetings” (1986 Tokyo Economic Declaration). In general, at these meetings the finance ministers and central bank governors are joined by the Managing Director of the Fund, taking account of the goal of strengthening multilateral surveillance called for at the 1982 Versailles Summit. In this context, evidence of elements of policy coordination appeared in the Plaza Statement in September 1985, the Louvre Accord in February 1987, and the Statement of the Group of Seven in December 1987.

The EMS constitutes a different approach to policy coordination. It is aimed at increasing the internal and external stability of participating countries. Factually there is an unwritten agreement by its members to adopt a stable exchange rate against the deutsche mark, providing a “low inflation standard.”6 In this system, ad hoc coordination is limited to the requirement to agree on new parities between the currencies of the member countries in the case of realignments, eleven of which have been implemented since 1979, the last one in January 1987. Apart from this, the EMS is an example of institutional coordination based on the constraints of a fixed exchange rate system. To some extent, international monetary rules can work as a substitute for coordination of economic policies. However, theoretical analysis has concluded that EMS member countries have little incentive to cooperate in fiscal policies,7 and empirical analysis considered apparent lack of progress in this field even as an element of uncertainty in the EMS.8 Against this, empirical evidence of convergence in inflation rates at a low level was impressive, although this trend was not confined to EMS members.9

Character of Policy Coordination

While the EMS has represented policy coordination in the monetary field, economic summit meetings have been characterized by a very broad approach to problems and needs. Special emphasis was always laid on the objective of steady noninflationary growth and higher employment, and on macroeconomic policies to achieve these ends. The declarations covering these issues were heavily influenced by intended home use, either to endorse existing policies, or to increase acceptance of planned policies.

In general, summit declarations fell short of policy coordination in favor of a limited cooperative approach intended primarily to reduce risks and uncertainties for national policies. Discussion was directed at the harmonization of priorities of policy objectives, of judgment on the functioning of economies, and of national strategies. This was a continuous process, as economic problems changed, as did prevailing schools of thought, and the political orientation of governments. Sometimes the underlying changes were bigger than only marginally adjusted wording suggested.

Summarizing national policy intentions has recently become part of Group of Five and Group of Seven statements. Most actions mentioned originated in autonomous decisions, although account was taken of available information on developments and policies in other countries. True policy coordination, however, would require participating countries to agree on national measures that are different from those implemented without coordination. In reality, this distinction is difficult to identify in view of the international flow of information. This holds in particular for situations when conformity of problems and priorities suggests parallel action.

Actually, ad hoc policy coordination of explicit and quantified measures has been confined to situations with pronounced imbalances calling for different policies in important countries. Efforts by participating countries were directed, to a large extent, at exploiting the presumed advantages of coordinated macroeconomic fine tuning compared with noncoordinated national actions.

Contents of Coordination Pledges

After the first oil price hike, the deterioration of structural conditions decisive for growth was generally underestimated, and the need to foster growth via stimulative macroeconomic policies was a common objective. In these circumstances a first, still qualitative, approach to policy coordination was undertaken at the 1977 London Summit Conference, when some countries promised unspecified expansionary measures in order to achieve their respective growth targets. However, it was not until one year later, at the 1978 Bonn Summit Conference, that agreement was reached on a detailed program of different actions. Apart from the inclusion of prior announcements by some countries, the main contributions to a coordinated macroeconomic strategy were the explicit commitments by the Federal Republic of Germany to initiate reflationary measures of up to 1 percent of GNP and by France to increase the budget deficit by about 0.5 percent of GNP, whereas Japan promised to secure a growth rate of GNP 1.5 percentage points higher than the year before by additional stimulation of domestic demand, if necessary. The United States, on the other hand, emphasized priority for anti-inflationary measures in fiscal policy. Its major contribution, however, was in energy conservation.

Although the action program included a number of newly announced measures, it is open to question whether this can be attributed to policy coordination, as there was a high probability of corresponding autonomous decisions. This holds for Germany, where economic policy was already about to strengthen the expansionary stance, and also for Japan, where following the “front-loading” of public investment in the first half of fiscal year 1978, supplementary expenditure was in the offing. In both cases, coordination efforts apparently supported the internal tendencies.

During the following years, after the second oil price hike had increased adjustment requirements dramatically and inflation surged worldwide, economic summit declarations reflected a shift from the concept of economic fine-tuning to the promotion of structural adjustment. Coordinated action was replaced by the principle of keeping one’s own house in order. Obviously influenced by the turn to Reaganomics in the United States, demand policies gave way to supply considerations in the 1981 Ottawa Summit Declaration. Fighting inflation was addressed explicitly as a condition for higher investment and sustained growth. In this context, the required reduction of public borrowing was to be achieved by dampening public expenditure, monetary growth was to be low and stable, and the role of markets in the adjustment process was emphasized. The summit conference now provided a forum for a searching analysis of national policies.10

Ad hoc policy coordination via explicit measures by the major countries was not resumed before the mid-1980s, when the world economic situation, characterized by unsatisfactory growth and serious external disequilibria, resembled the situation in 1978. Evidence of coordinated action is to be found in the statements by finance ministers and central bank governors, who now regularly conducted “multilateral surveillance to make their best efforts to reach an understanding on appropriate remedial measures whenever there are significant deviations from an intended course” (1986 Tokyo Economic Declaration).

The turning point can be dated back to the Plaza Meeting of the Group of Five in September 1985. At that time, it was stated that “some further orderly appreciation of the main non-dollar currencies against the dollar is desirable,” and that governments and central banks of the five participating countries “stand ready to cooperate more closely to encourage this.” Strictly speaking, this was an agreement on an intermediate target, and with regard to macroeconomic policy this was tantamount to unspecified cooperation falling short of true coordination. “Agreed policy actions” represented a mere synopsis of current national policies.

After a substantial fall in the dollar exchange rate a fundamental change of strategy was precluded at the Louvre Meeting in February 1987, geared at stability of exchange rates “around current levels.” Agreed policy undertakings again comprised a majority of national measures, resolved without international coordination. However, they were supplemented by commitments by Germany “to increase the size of the tax reduction already enacted for 1988” and by Japan to prepare a “comprehensive economic programme … so as to stimulate domestic demand.” Corresponding to these elements of announced policy coordination by surplus countries, U.S. policy was aimed at “reducing the fiscal 1988 deficit to 2.3 percent of GNP.” Finally, the Statement of the Group of Seven in December 1987 contained additional commitments by the surplus countries. The Government of the Federal Republic of Germany stated that it “will not seek to offset the budget revenue losses arising from recent developments” and the Government of Japan that “in the FY 1988 budget the expenditure for general public works will not be less than that for the FY 1987 budget, including the July supplemental.”

Compared with the explicit fiscal policy commitments in these statements, passages on monetary policy have been less elaborate and more vague. This is partly due to the important role of other institutions in this field, in particular of the monthly meetings of the central bank governors at the Bank of International Settlements (BIS) in Basle.

Effects of Macroeconomic Policy Coordination

The coincidence of national actions that take into account information obtained in the process of international cooperation, and of concerted actions in the framework of policy coordination, renders it impossible to separate the respective effects neatly. Apart from this fundamental restriction, the analysis of observed effects in the two periods of policy coordination cannot be expected to provide clear evidence, for different reasons. The effects of the 1978 Bonn Summit were obscured by the subsequent oil price shock. As for the recent approach, policy coordination is still under way; therefore, the investigation will be limited to examining the effects of announced coordinated policy measures on policy conduct and to commenting on actual economic performance with respect to the envisaged effects.

Bonn Summit

In order to comply with its commitments at the Bonn Summit the German Government in July 1978 decided on tax cuts and additional expenditure of about 1 percent of GNP in 1979 as well as in 1980. The Japanese Government in early September 1978 submitted a reflationary package, which comprised expenditure of 1.3 percent of GNP, distributed over two fiscal years. However, this expenditure was not additional to the original budget. The central government in Japan, which accounted for nearly half of the package, hardly raised budgeted expenditure figures, given savings stemming from lower-than-expected inflation.

According to a contemporary simulation using the OECD Linkage Model, the impact of the announced expansionary measures should have been marked, hinting at an increase in total output, compared with the baseline level, of 1.1 percent in 1979 and 1.4 percent in 1980 in Germany, and of 0.4 percent and 1.0 percent in Japan.11 However, the external shock of the second oil price hike and the anti-inflationary response of monetary policy increasingly dominated economic developments. GNP growth began to slow in the second half of 1979 in Germany as well as in Japan, while inflation accelerated markedly. The resulting shift of the domestic demand differential between deficit and surplus countries sprang primarily from marked deceleration in the growth of domestic demand in the United States (see Table 1).

Table 1.

Demand and Output in Industrial Countries, 1977–80

(Volume, annual change, in percent)

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Source: Organization for Economic Cooperation and Development, Quarterly National Accounts.

Changes expressed as a percentage of GNP in the preceding period.

OECD

Including intra-European trade in goods and services.

Given the strong impact of the oil price increase on economic developments and policies in industrial countries, any evaluation of the real effects of actions agreed at the 1978 Bonn Summit must be highly arbitrary. This supports the continuing division of opinions on the merits of the pursued “locomotive” or “convoy” approach to policy coordination. In any case, there is strong evidence that at the time of the summit meeting, expansion in Germany and Japan was about to accelerate on its own. Additional fiscal reflation (Table 2) met in both countries with accommodating monetary policy which had been aimed in 1977 and 1978 at slowing appreciation vis-à-vis the dollar. Thus, policy conditions favored the inflationary effects of increasing oil prices. Consequently stabilization and consolidation efforts in the following years turned out to be more costly in macro-economic terms. These detrimental medium-term consequences must be emphasized in any critical assessment of the Bonn Summit policies,12 rather than the size of possible output effects achieved in the short run. Obviously, negative evaluation is not so much directed at international policy coordination per se than on its capacity for fine tuning.

Table 2.

General Government Financial Balances, 1977–80

(As a percentage of nominal GNP/GDP)

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Source: Organization for Economic Cooperation and Development.

Surplus (+) or deficit (–).

OECD estimates. Reflects deliberate policy actions, fiscal drag, changes to debt service costs and variations in resource revenues. A positive sign indicates a move toward restriction (surplus); a negative sign indicates expansion (deficit).

Coordination Since Plaza

Policy coordination following the Plaza Meeting in September 1985 was aimed at more balanced growth to reduce destabilizing external imbalances among major industrial countries without jeopardizing the moderate growth achieved. The first phase was marked by the statement that exchange rates should play a major role in adjusting imbalances, that is, that a depreciation of the dollar should shift competitive positions in order to foster adjustment. In fact, this approach was based in particular on corresponding policies by central banks, whereas fiscal policy was addressed only by a general admonition that deficits should be reduced in countries where the budget deficit was considered “too high.”

The second phase, starting with the Louvre Meeting in February 1987, proclaimed exchange rate stability “around current levels” and implied a distinct change in the relative orientation of monetary policies. Beyond that, adjustment was now to be supported by ad hoc fiscal policy coordination among major industrial countries—hence, the agreement aimed at a coordinated shift of the policy mix among major countries.

Effects of Coordination on Monetary Policy

For years, summit meetings had been characterized by the “absence of any meaningful attempt to seriously address the problem of coordination of domestic monetary policies, or the international consequences of divergent monetary policies.”13 This was traced back to the independence of leading central banks from governments, the prior need to coordinate domestic monetary policy with domestic fiscal policy, and important differences in the formulation and conduct of monetary policy in the different countries. Beyond that, the often discreet character of monetary policy obviously renders it unsuitable for the conspicuous procedures of economic summits. Instead, monetary cooperation is discussed in the framework of the Fund, the BIS, and the European Community; of these, the monthly meetings of the central bank governors at the BIS are pivotal for policy coordination. Examples of ad hoc action were the discount rate cuts by the central banks of the United States, Japan, and Germany in March 1986, or the concerted action by a number of European central banks in November 1987. However, quite often coordination and the phenomenon of leadership and followership in monetary policy cannot be clearly separated.

Although monetary policy per se continued to play a minor role in recent summit declarations and Group statements, policy conduct has been markedly influenced by the agreements on exchange rate objectives, as in surplus countries the emphasis shifted, at least temporarily, from money supply as an intermediate target to the stabilization of exchange rates.14 However, commitments still remained vague: this holds for commonly accepted exchange rate targets, as the discussion on the pace of the dollar depreciation during the period between the Plaza and the Louvre Meetings and on the existence of unpublished target zones for exchange rates since then has shown; and for instruments, in particular for the timing and amount of intervention on the exchange markets. This vagueness can be partly accounted for by the endeavor of governments and central banks to keep away as far as possible from the problems typical of a fixed-rate regime. But there was partly a real lack of consensus on fixing common targets or on the evaluation of instruments and their effects.

Indeed, depreciation of the dollar took place in 1986 without true coordination of monetary policies between major industrial countries. The Federal Reserve Board of the United States continued its previous expansionary stance and the pronounced weakness of the dollar in the course of 1986 also induced the central banks of surplus countries to adhere to expansionary policies. This period was characterized by recurrent conflict on appropriate levels of interest rates in the major countries.

Indications of cooperative conduct in monetary policy appeared after the Louvre Meeting, when stabilization “around current levels” was agreed as a new exchange rate objective. The essential monetary policy change was a gradual tightening in the United States, though the central bank discount rate was not raised before early September 1987. The contribution by the central banks of surplus countries to the coordination of monetary policies showed up in a progressive widening of short-term interest differentials in 1987 (see Table 3 and Chart 1). In Japan and Germany this happened at the expense of adherence to their respective money supply projection or target. The strategy was supported by substantial exchange market interventions, in particular by non-U.S. central banks. However, reconciling the support of the exchange rate of the dollar with internal policy objectives in the United States and in the surplus countries increasingly posed problems. The exchange-rate-oriented coordination of monetary policies apparently reached its limits last autumn, obviously because the Louvre level of exchange rates was out of line with determinants, apart from monetary policy considerations.

Table 3.

Quarterly Monetary Indicators

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Source: International Monetary Fund, International Financial Statistics (partly supplemented from national sources).

Quarterly average of monthly rates.

M1.

M3.

Last month of period until 1986, II.

January/February.

Chart 1.
Chart 1.

Exchange Rates and Interest Rate Differentials, 1985–87

Source: International Monetary Fund, International Financial Statistics.

The analysis of monetary developments since the Plaza Meeting leaves room for doubt that true policy coordination existed among the major countries—in the sense that it led to policies that were different from those implemented in interdependent economies without international cooperation. This problem is closely related to the factual leadership of the United States in monetary policy, which, in its turn, was obviously governed primarily by internal priorities. Thus, the change of orientation from intended depreciation of the dollar to dollar-supporting policies at the time of the Louvre Meeting clearly went along with a shift from one-sided demand stimulation to the prevention of rising inflation in the United States.15

Effects of Coordination on Fiscal Policy and on Policy Mix

The discretion peculiar to monetary policy was not applied to the coordination of fiscal policy. To some extent this was due to the desire of governments to improve their reputation by demonstrating the success of international negotiations. Beyond that, however, the coordination of demand management by fiscal policy was obviously given a high degree of credit by several governments.

Fiscal measures announced in 1987 have been executed or are under way. Thus, the May 1987 fiscal package in Japan included tax cuts of 0.3 percent of GNP and public investment expenditure of 1.5 percent of GNP, distributed over two fiscal years. In Germany, tax cuts for 1988 were raised from 0.4 percent to 0.7 percent of GNP. Complying with the commitment of the Group of Seven Statement of December 1987, the German budget deficit has increased markedly. The general government deficit will come close to 2½ percent of GNP in 1988—twice as large as two years before.

Corresponding to expansionary measures by the surplus countries, the United States has enacted consolidation measures. However, the reduction of the deficit will fall short of the announcement of the Louvre Accord, which envisaged a deficit of 2.3 percent of GNP in fiscal year 1988. After a subsequent revision of targets, the expected outcome is now about 1 percentage point higher. Indeed, the figure in the Louvre Accord corresponding to legislated deficit targets lacked credibility from the beginning. This experience points to the limits of identifying published “agreed undertakings” with policy coordination.

As the influence of coordination efforts on the formation of national policies cannot be separated from that of coincident autonomous decisions in the framework of international interdependence, an evaluation of recent developments will be confined to the question whether the fiscal policy conduct in major industrial countries has, on the whole, worked toward realizing commonly declared objectives.

As to the envisaged promotion of sustained growth, some progress was achieved by the reduction of the aggregate general fiscal deficit of industrial countries in 1987 and the consequent improvement of conditions for lower real interest rates in the world.16 The short-term impact of relative changes in the fiscal policy stance of major countries indeed supported the envisaged reduction of external imbalances, if changes in public sector deficits are taken as a yardstick. Whereas the expansionary stance in the United States climaxed in 1986 and was followed by a tendency toward consolidation, fiscal policy stance has shifted from deflationary to about neutral in Japan since 1985,17 and from deflationary to expansionary in Germany (see Table 4).

Table 4.

General Government Financial Balances, 1984–87

(As a percentage of nominal GNP/GDP

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Source: Organization for Economic Cooperation and Development.

Surplus (+) or deficit (–).

OECD estimates. Reflects deliberate policy actions, fiscal drag, changes to debt service costs and variations in resource revenues. A positive sign indicates a move toward restriction (surplus); a negative sign indicates expansion (deficit).

The difficulties of evaluating the impact of policy coordination on effective policy conduct since the Plaza Meeting are compounded in the assessment of the mix of monetary and fiscal policy. In the United States, however, where both fiscal and monetary policy were to be termed expansionary in 1985 and 1986, and rather deflationary in 1987, national decision making was obviously dominant. In the surplus countries, on the other hand, coordination may have had some influence, at least on the timing of policy actions. This holds for Germany, where the mix of deflationary fiscal policy and broadly neutral monetary policy in 1985 has made way for a rather expansionary stance in both fields since 1986, and also for Japan, where similar change materialized. On the whole, the shift in relative policy mixes in these three countries starting in 1986 seems to have supported the different domestic demand trends called for by the need to diminish external imbalances. At the same time, however, limitations to this approach were seen by surplus countries with regard to the general objective of ensuring conditions for noninflationary growth.

Empirical Evidence of Effects of Coordinated Policies on Economic Performance

The difficulties of distinguishing uncoordinated national policy undertakings from coordinated efforts impede any attempt to show the impact of coordinated policies on the economic performance of participating countries. This is true even without the external shocks that were experienced after the 1978 Bonn Economic Summit. In these circumstances, actual international policy discussion disregards specific relationships between realized measures and their impact. It centers instead on the comparison of envisaged economic developments with effective performance or with forecast figures in the case of current periods.

Given that policy coordination since the 1985 Plaza Statement was aimed primarily at more balanced growth and a reduction in external disequilibria, progress in major industrial countries is showing up in real developments. Though aggregate GNP growth of the major industrial countries held close to the 3 percent figure of 1985 and obviously came up to expectations of governments, Western Europe, especially Germany, lagged. But this pattern was markedly influenced by the progress in external adjustment, as net exports were a retarding force in Western Europe and in Japan from 1986 onward, and a stimulating force in the United States from 1987 (see Table 5). Against that, the growth differential of real domestic demand shifted in line with respective policy differentiation between major surplus and deficit countries. Taking 1985 as a base year, figures for 1987 show a distinct acceleration in Germany as well as in Japan, against deceleration in the United States. This demand differential will continue in 1988. Progress in real adjustment will be reflected increasingly in nominal balances, as J-curve effects will abate.

Table 5.

Demand and Output in Industrial Countries, 1984–89

(Volume, annual change, in percent)

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Sources: Calculated from national figures, Western Europe: OECD, Quarterly National Accounts; International Monetary Fund forecasts for 1988 and 1989.

Changes expressed as a percentage of GNP in the preceding period.

Including intra-European trade in goods and services.

OECD. 1987 partly estimated.

It must be kept in mind, however, that the realization of the envisaged differentiation of demand trends between the United States and the surplus countries are specific evidence of coordinated policy actions. The case of fiscal coordination measures in Japan illustrates this point. There, the remarkable fiscal package of May 1987 made up for an otherwise considerable contractionary impulse, and the net fiscal stance is estimated now to be broadly neutral in 1987 and 1988.18 Taking this into account, the vigorous increase of domestic demand must be attributed mainly to factors apart from fiscal policy; among these, the highly flexible adjustment of the economy to the earlier dollar shock seems to have been of crucial importance. On the contrary, in Germany where fiscal stimulus has occurred in 1987 and 1988, slow growth points to structural impediments for adjustment as being more important than in Japan.

Table 6.

Foreign Balances of the United States, Japan, and the Federal Republic of Germany, 1984–89

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Sources: Calculations based on national figures and on forecasts by the International Monetary Fund for 1988 and 1989.

United States: 1982; Japan, Federal Republic of Germany: 1980. Forecast figures based on annual percentage changes of foreign balances and GNP.

Empirical Evidence from International Macroeconomic Models

All in all, ad hoc policy coordination has not only been rare up to now, but, when accomplished, the observed effects were far from clear. This experience continues to support the search for empirical evidence based on econometric simulations. The most extensive exercise of predicting the external and the domestic effects of specified policy changes in this way was organized by the Brookings Institution in 1986 on the basis of twelve leading international macroeconomic models. The following discussion focuses on the effects of a sustained increase of government spending equal to 1 percent of GNP, separately for the United States and for non-U.S. OECD, and likewise of an increase in money supply of 4 percent of GNP (see Table 7). On average, predictions for the second year of the policy change showed a marked concentration of GNP effects on the region where policy was changed.19 The effect of fiscal stimulus on foreign GNP is somewhat more pronounced when the policy is implemented by the United States rather than by non-U.S. OECD. The effects of fiscal stimulus on current balances in either case showed a distinct deterioration of the own balance and an improvement of foreign balances. Against that the consequences of an increase of money supply on current balances were on average negligible in the case of action by non-U.S. OECD, whereas in the case of action by the United States the impulse was negative for its own balance and only slightly positive for the balance of the non-U.S. OECD. The latter points to interaction with non-OECD, often neglected in discussion of the effects of policy coordination. However, the average figures20 are generated from predictions of the twelve models that vary widely in magnitude and also in sign.21 Taking into account the different properties of the models, such disagreements came as no surprise, and they point to the limits of empirical evidence of externalities derived even from respected models.

Table 7.

Simulation Effects of Monetary and Fiscal Policy Changes1

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Source: Simulation effects as reported by Frankel and Rockett (1986) for the second year of policy change. Participating models were MCM, Federal Reserve Board; EEC, European Commission; EPA, Japanese Economic Planning Agency; LINK, Project Link; LIVERPOOL, Patrick Minford; MSG, McKibbin-Sachs; MINIMOD, Haas-Masson (International Monetary Fund); VAR, Sims-Litterman; OECD, Interlink; Taylor, Stanford; Wharton; DRI, Data Resources.

Effects on gross national product (GNP) and on current account (CA) of respective domestic (D) and foreign (F) economies.

Increase in money supply of 4 percent.

Increase in government expenditure equal to 1 percent of GNP.

Average of reporting models.

A specific approach is needed for predicting not only the effects of singular policy action, but of policy coordination per se. There have been relatively few empirical studies in this field, an overview of which was presented in the paper of Home and Masson (1988). These comparisons of a cooperative solution with a noncooperative equilibrium are based on essential assumptions concerning, for example, the models of the decision makers in the exercise, the availability and use made of information, and the objectives of governments. The respective characteristics of simulations are quite different, and the outcome is highly dependent on the assumptions made. However, if it is assumed that information on other national policies is available and also taken into account by governments in uncoordinated national policies, evidence from simulation in general shows only small gains from coordination.22

Recent discussion among governments of major industrial countries pointing to disagreement “on how the world actually works”23 drew special attention to the assumption of consensus on a “true” model. A study of Frankel and Rockett (1986), on the consequences of disagreements among policymakers on the model, used the results of econometric models of the world economy that participated in the parallel simulation arranged by the Brookings Institution. Under the assumption that each model might qualify as the true model, 512 possible combinations of different models of policymakers and of models representing reality were analysed. The investigation in the outcome of international coordination of monetary policy then resulted in welfare gains for the United States in 56 percent of cases, as against losses in 40 percent, with no effects found in a few cases. For non-U.S. OECD countries the respective figures were 58 percent against 39 percent. International coordination of fiscal and monetary policy together resulted in gains for the United States in 55 percent of cases, and in losses in 45 percent, whereas in non-U.S. OECD countries 55 percent stood against 43 percent. According to this simulation, the likelihood of improvement by policy coordination comes out slightly higher, on average, than that of deterioration.

To be sure, empirical evidence for the effects of policy coordination derived from existing econometric models for the world economy cannot claim to form an image of true relationships and effects, as restrictions arising from imperfections of the models, from inevitable simplifications and assumptions made in the exercise are important for the outcome.24 The lack of distinctiveness leaves ample room for approaches trying to improve knowledge on the externalities of policy action and on the working of policy coordination by using simple models. Often, results from such exercises are less ambiguous, but they cannot pass for empirical evidence.

Summary

As the analysis has shown, empirical evidence for the effects of policy coordination among major industrial countries is still scarce, and often not very reliable. This partly reflects the general problem of separating the specific impact of macroeconomic policy from other determinants of economic developments. Beyond that, it is difficult in reality to distinguish policy coordination from less intensive international cooperation and from autonomous national policies, which take into account generally available information on the policy of foreign countries. Identified cases of ad hoc macroeconomic policy coordination are confined to the 1978 Bonn Economic Summit and to the most recent period since the 1985 Plaza Meeting. They offer little evidence of discernible effects, whereas the outcome of simulation by existing models for the world economy obviously comes up against essential restrictions.

There is a number of causes for the observed scarcity of policy coordination. Notwithstanding the existence of a commonly emphasized main target, mainly “inflation-free sustainable growth,” evidence has repeatedly shown that priorities are different from country to country in short-term conflicts and in the way risks are weighed. Apart from divergent preferences, influenced by specific historical experience or, at times, by political orientation, there are also objective reasons. Thus the role of the deutsche mark as a minor reserve currency in fact creates stronger stability constraints for the German economy than the dollar does for the U.S. economy.25

A more important impediment to the transformation of readiness for cooperation into effective coordination was differing views on how economies work, and correspondingly, on appropriate action. Sometimes these divergences seemed to be determined by different time horizons, also related to election dates, but often underlying schools of thought were apparently distinct. If, as a consequence of this, the monetary policy stance, for example, was measured by the money supply in one country, and by the level of interest rates in another, sustained monetary policy coordination was hardly possible. Agreement on fiscal policy coordination was impeded primarily by lack of consensus in weighing the short-term impact on demand against longer-term effects on growth. Apart from this, the limits for ad hoc fiscal coordination arising from internal political constraints for national decision making were apparent, in particular in the United States.

Divergences of opinion were accentuated in the 1980s by rather quick changes of concepts and policies in the United States. This has complicated the role of economic leadership. Doubts in this respect, together with the ability of the économie dominante to demonstrate long lasting benign neglect of external imbalances tended to reduce the credibility of coordination announcements. This amounts to scaling down possible reduction of uncertainties on foreign economic policies.

The few cases of ad hoc macroeconomic policy coordination were aimed primarily at short-term effects. Even tax cuts that were part of supply-oriented strategies were timed according to their immediate effects on demand. However, internationally coordinated fine tuning is subject to the many restrictions that are well known at the national level. Occurrence of ad hoc macroeconomic policy coordination was favored, therefore, by the appearance of a common feasibility illusion or of a feasibility illusion of the économie dominante at least.

Whereas the possible effects of policy coordination at the end of the 1970s were concealed by the effects of the second oil price hike, coordination in the second phase starting with the Plaza Statement is still under way. Apart from new dislocations caused by the oil price shock in 1986, though with the opposite sign to the two former price hikes, the effects of policy coordination cannot be separated even approximately from the effects of other determinants. Therefore, recent misfortunes of policy coordination on the common targeting of the dollar exchange rate cannot be safely attributed to single causes. However, it appears that an adequate contribution of fiscal policy coordination among major industrial countries to the adjustment process meant too heavy a load on monetary policy inside and outside the United States.

The source of the rising demand for macroeconomic policy coordination is the obvious misfortune of noncoordinated national policies and the disturbing consequences of disregarding externalities. Widespread belief in coordination gains seems to be derived from a comparison of these experienced shortcomings with the expected advantages of a theoretical approach based on assumed common knowledge of future trends, of true economic relationships, and of appropriate policies. In all respects, however, recent experience warns us to be modest and thereby confirms the hesitation derived from simulations of coordinated policies using existing models. In these circumstances, the merits of international economic cooperation among major industrial countries are to be expected rather in the field of an increasing awareness of the externalities of national policies, in improving the international exchange of information on economic trends and policies, and in taking all this into due consideration when conceiving national economic policies.

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Comment

Hans Tietmeyer

For a large part of my professional career I have been closely involved in international policy cooperation, including the preparation of summit meetings, and since 1982—as the sherpa of Chancellor Kohl—I have been charged directly with the preparation of the summit conferences. I am, therefore, extremely interested in the topic of coordination. Having the advantage of insider knowledge, I will try to bring into this discussion my own experience with policy coordination among the major industrial countries. As a participant I am not at best equipped to have a clear judgment on the empirical evidence. So I will take the liberty to make some general remarks on policy cooperation. (I prefer cooperation to coordination, because cooperation has a broader meaning, while coordination has more the taste of an ambitious international demand management.)

In the course of the last few years, policy cooperation among these countries has developed into a dense network of mutual consultations and policy commitments, of which the summits and Group of Five or Seven meetings were the most important part. Evaluating the impact of this form of policy cooperation, one has to be aware that it means much more than mere coordination of macroeconomic policies in the fiscal and monetary fields. It means cooperation between sovereign nations on all important economic issues such as trade, development and debt, energy and structural policy, and coordination through international organizations such as the Fund, the General Agreement on Tariffs and Trade (GATT), and the Organization for Economic Cooperation and Development (OECD).

In addition, over the years since Rambouillet there has been no single and agreed economic summit philosophy. The communiqués rather reflect changing priorities in national policies and divergent theories on how the economy works and accordingly what strategy should be pursued. So one should not speak of economic coordination as though it were well defined.

The main motive and the objective of the first summit in Rambouillet was to overcome the impact of the oil price hikes on the world economy and to find a new framework for cooperation on exchange rate matters after the breakdown of the Bretton Woods System.

The industrial countries had reacted to these challenges with divergent policies which in turn produced growing inflation differentials and current account disequilibria. The main issue on the agenda was better coordination of macroeconomic policies, even if the other topics—the commitments to free trade and the formalization of the existing monetary system—gained more public attention in the press. The agreed policy approach to this situation was a discretionary international coordination of the Keynesian demand-oriented national policies already underway in the participating countries. Despite some differences in the concept, this summit philosophy of coordinated demand management prevailed until the Bonn Summit in 1978, where—as described in the preceding paper by Günter Groβer—a detailed fine-tuned quantitative program to stimulate the economies was launched. But one can dispute whether, for example, the German decision would not have been taken without the summit.

With the Reagan Administration coming into office in 1980, the summit philosophy and thus the economic strategies shifted from demand management to more supply-side policies. The following Summits of Ottawa, Versailles and especially that of Williamsburg, tried to reach a common understanding on a more lasting improvement of the conditions for economic growth by supply-side measures, free markets, free floating, and strict monetary targeting.

The concept of economic policy competition on the basis of agreed principles instead of macroeconomic policy coordination gained ground—at least on the U.S. side the attitude of benign neglect vis-à-vis exchange rate movements of the U.S. dollar prevailed. At that time the course of macroeconomic policy and especially the policy mix of fiscal and monetary policy in the United States was quite different from that in the other industrial countries. And despite many efforts on the sidelines of the summits, in reality there was no chance of a change at that time. Had a consensus in fact materialized then, our current problems would no doubt be much less serious. But things took a different turn.

Since the middle of the 1980s the pendulum has swung back again to more concrete forms of economic policy coordination. The unbalanced policy mix in the United States, the different growth performance in the United States, Japan, and Europe, and the resulting distortions in the exchange and current account pattern called for a new coordinated policy approach between the major industrial countries.

At the Bonn Summit in 1985, the participating countries committed themselves to a more detailed program of action and specific priorities for national policy to sustain noninflationary growth and higher employment. This agreement in Bonn was the starting point for the Plaza Accord launched in September 1985. The situation in Bonn in 1985 appeared to resemble that in 1978. However there were substantial differences in the objectives and the concept. The main thrust of economic policy commitments of the Bonn Summit of 1985 remained directed toward the supply side by following a prudent fiscal and monetary policy, reducing—where excessive—the share of public spending in GNP and removing obstacles to economic growth. There was no return to ambitious fine tuning in demand management and no program of specific quantitative targets.

Over the years, not only philosophies and economic concepts have changed; the summits also reflected the changing priorities that heads of state attached to the other topics of international policy cooperation. To illustrate:

  • In the second half of the 1970s, energy policy was at the center. Summit countries pledged to conserve energy and to increase and diversify energy production in order to reduce the dependence of industrial countries on oil and other imported energy to less than 50 percent. They even agreed on the need to increase nuclear energy production—an impasse as we now know.

  • In the early 1980s, more emphasis was put on development aid and on the north-south dialogue. The question of how to deal with the dramatic increase of external debt of a number of developing countries became increasingly important and will—no doubt—remain on the agenda in the coming years.

  • From 1983 onwards, environmental policy, and, since Tokyo, agricultural policy have become major issues on the agenda.

  • The most important topic at all summits—besides the coordination of fiscal and monetary policies—was the trade issue. All participants were convinced right from the beginning that protectionism does not solve problems but creates them, even if in reality they all are sinners in one way or another.

This brief reminder of the economic issues discussed at the summits and of the changes in economic theories and priorities over time makes it sufficiently clear, I believe, how difficult it would be to give any quantitative assessment of the impact of coordination. It would, therefore, fail to do justice to the complex process of this form of economic cooperation if one were to distinguish—as suggested in the paper—between unspecified cooperation and identified cases of policy cooperation like the 1978 Bonn Summit. It is not surprising, therefore, that the numerous theoretical approaches to measuring the advantages or disadvantages of international cooperation are highly controversial.

Before giving my own assessment of the effects of the summit meetings I should briefly describe the role of the summits as I see it. The summits are not decision making forums. Each year they take stock of all relevant areas of national and international policy and provide an opportunity to frame economic guidelines. This gives the heads of state, who deal mainly with national policies in their day-to-day work, once a year a comprehensive overview of the most urgent international economic problems, the areas of interdependence in the world economy, and the risks involved for their national economies. This has certainly contributed to making them aware of their long-term self-interest.

In addition, the summits provide heads of state with the unique opportunity to get to know different economic “models” and policy concepts and the different decision making processes in the participating countries. For the United States, Canada, and Japan, the economic summits are the only international forum for economic policy discussion at the highest level, whereas the heads of state of the European countries have been involved in this process since the establishment of the European Economic Community.

From my experience in these discussions, there seems to be not so much a lack of willingness to cooperate, but more often disagreements and misunderstandings on how to cooperate. This concerns not only the different policy principles and theories, but especially the differences in constitutional competences and traditions. Judgments of the so-called “lack of political will” should, therefore, be made with care. Even the heads of state and governments have limited and—what might be more important—different powers to commit countries to a specific policy.

Empirical evidence of the effects of this summit cooperation could primarily be expected from quantitative programs of the type agreed at Bonn in 1978. However—as Groβer’s paper points out—even the effects of this quantitative policy coordination cannot be separated from the effects of other determinants. When evaluating the general impact of policy cooperation among the major industrial countries, one should therefore rather ask what has been avoided by the summits, and what impulses have been given.

One of the most concrete achievements—in my view—has been the worldwide resistance to direct protectionism in trade; the summits have given new impulses to our liberal trade system (such as the Tokyo and Uruguay Rounds). Another result has been the initiatives to alleviate the debt burden, specially of the poorest countries. Looking back to the 1970s, I would say that the summits have contributed greatly to preventing misdirected policy prescriptions to counter the energy shocks. Furthermore, the very sensitive issue of agricultural policy has now been put on the agenda of the summits and thus will come under worldwide surveillance. The same is true of environmental policy. The indirect economic effects of the summit meetings at national and international levels are of course impossible to qualify.

The absence of major disturbances in the world economy over the past years cannot be attributed alone to the stronger cooperative efforts, but I am convinced that these efforts have been a significant contributing factor.

Could the summit procedure be improved? When Giscard d’Estaing and Helmut Schmidt initiated the first summit, they were inspired by the intimate atmosphere of their meetings in the Library Club as Ministers of Finance. The attempt to transfer this atmosphere to the meetings of the heads of state of the seven countries turned out to be an illusion. Summits bringing together the heads of state and governments of the seven major countries will always be a major public event, for home consumption as well.

There is, however, room to make this form of cooperation more efficient. I only want to mention a few points:

  • heads of state must have enough time for comprehensive discussion on major policy issues and should not quarrel over pre-prepared communiqués;

  • economic summits should avoid short-term orientation of their objectives and should stick more to long-term strategies;

  • the summit countries should resist building up a “summit bureaucracy”;

  • discussions about political issues without direct economic relevance, like terrorism or drugs, should be kept to a minimum at economic summit meetings, although they cannot be avoided completely at this level.

The other main forums for economic policy coordination—also mentioned in Groβer’s paper—are the meetings of the ministers of finance and the central bank governors of the summit countries. In substance they are more important than the summits. The cooperative policy approach introduced with the 1985 Plaza Agreement and further developed in the 1987 Louvre Accord and the renewal of that Accord in December last year aimed to defuse the dangerous and acute tensions resulting from the erratic exchange rate movements of the U.S. dollar and the imbalances in current accounts by more conspicuous operational measures in the field of fiscal, interest rate, and intervention policy.

This cooperation (which besides the formal meetings of the ministers includes a regular exchange of views among the ministers, governors, and deputies) represents the extent of cooperation that can now be realistically achieved in the macroeconomic sector between the major industrial countries. It is a pragmatic type of cooperation, that attempts to bring economic policies closer into line and, by doing so, contributes toward greater stability in the exchange rate system. It would be wrong—in my view—to focus too much on exchange rates, even if exchange rates can be of high importance in certain situations. The main focus has, of course, to be on underlying policies. But cooperation can involve in certain situations taking a position on the appropriateness of a given pattern of exchange rates and giving coordinated signals to the markets or resisting short-term disruptive or disorderly movements in exchange rates by coordinated intervention. In this context, the use of a selected list of indicators can also be useful for better coordination of policies. It is, however, clear that these indicators can only serve as an analytical tool. They cannot replace the exercise of judgment, nor should they be used as “triggers” for policy decisions.

As to the evaluation of this more concrete form of cooperation, I think there is now widespread agreement, both among the participants and the general public, that this coordinated policy approach has been all in all advantageous. The recent stance of policies in the major industrial countries has been clearly influenced by the Louvre Accord of last year.

  • Fiscal policy in the respective countries has now begun to play a more important role in the adjustment process. Divergences in fiscal stance among industrial countries tend to be reversed.

  • Monetary and intervention policy in the exchange markets are being more closely coordinated and more effectively used to stabilize exchange rates without risking new worldwide inflationary pressures.

  • Structural and trade policies are no longer excluded from the adjustment process and will become a major issue in future discussions.

The adjustment process to achieve a better balance of payments pattern, the most important objective of this form of cooperation, is now clearly under way.

The fact that the dollar has stood the test during recent months and has been quite stable since the beginning of the year, that central banks have intervened only temporarily, and that interest rate differentials have remained relatively unchanged is—in my view—sufficient empirical evidence that this coordination has been effective.

Of course, economic summits and meetings of the ministers of the Groups of Five and Seven cannot solve all the problems the world economy is facing. But they can and they have provided efficient tools for the containment of conflicts. These conflicts would have escalated and unilateral decisions with negative side effects would have been taken more often if they had not been channeled through this rather dense network of consultation procedures.

The present degree of global economic integration, which is likely to intensify in the future, calls for enhanced cooperation on economic policy. Such cooperation can only be successful in the long term, however, if it is based upon market forces and caters to the legitimate interests of all sides. It has to be built on the long-term self interest of the countries concerned.

Comment

Manuel Guitián1

In this paper, Günter Groβer has provided us with a broad, well-reasoned and interesting examination of the record of economic policy coordination among major industrial countries since the mid-1970s. After a brief summary of the existing forums for policy coordination and the scope of the various economic summit meetings, the paper focuses on an analysis of the evidence of macroeconomic policy coordination, beginning with the oft-examined Bonn Summit Meeting of 1978 (see Putnam and Henning (1986), Bryant (1987), and Fischer (1987), for example) and continuing with the experience that has become available since the Plaza Agreement of September 22, 1985. The paper discusses the actual record of coordination on the conduct and mix of fiscal and monetary policies and, in addition, it examines the evidence that has been derived on the basis of econometric simulations from a variety of models conducted under the auspices of the Brookings Institution.

The analysis and the broad assessment of policy coordination contained in the paper are balanced and, accordingly, they lead to conclusions that are measured and, as such, easy to agree with. In my comments, therefore, rather than focusing on specific country experiences, I will highlight certain issues raised in the paper that 1 believe are critical to achieve further progress in the investigation of the merits and demerits of policy coordination at the international level.

In the analysis of issues of policy coordination, there are a number of taxonomic and methodological questions to be addressed at the outset. On the taxonomy front, there is a need to distinguish clearly the meaning and scope given to the term “coordination” within a spectrum of possible interpretations, that before reaching the level of what is normally understood by coordination, encompasses consultation, cooperation, and harmonization—to use Henry Wallich’s terminology (Wallich (1984); see also Bryant (1987)). Groβer is well aware of these issues, as is shown by his conclusion with regard to the difficulty of distinguishing policy coordination from less intensive modalities of cooperation and even from autonomous policymaking.

In the area of methodology, there arise the well-known issues of the appropriate standards of measurement that can be applied to the empirical evidence available on policy coordination. Should coordination be evaluated by comparisons of experiences “before and after” its introduction (what is versus what was)? Or should it be assessed by relating the results to the objectives of coordination (what is versus what should be)? Or should it be focused instead on a comparison between the outcomes of a specific instance of policy coordination and those that would obtain either in its absence (what is versus what would have been), or in the presence of other possible instances of coordinated policy action (what is versus what could have been)?

The issues posed by these methodological quandaries and taxonomic difficulties are thorny and the paper under discussion (as well as the increasing number of articles which are appearing on the subject of coordination) provides evidence to this effect when it states, for example, that the observed effects between two periods “cannot be expected to provide clear evidence” on policy coordination for a variety of reasons (p. 116). Among these reasons, the paper points to the difficulty of distinguishing the effects of an independent national policy action that is based on information available on other countries’ policy stances from those that would result from explicitly coordinated actions. The paper also notes the complications that arise in this regard on account of the absence of ceteris paribus conditions, which tends to mar the identification of the direct consequences of policy measures. The former difficulty focuses on the need to separate independent (though informed) action from coordinated action and, therefore, it concerns the possibility of identifying unambiguously instances of policy coordination. The latter complication centers instead on problems that relate to the standard of measurement of empirical evidence. The paper uses mainly one of the standards discussed above, that is, the yardstick that compares actual economic performance (results) with that which had been envisaged (objectives) at the time the coordinated policy decisions were made (see in particular the section on the effects of macroeconomic policy coordination). But there are also instances of comparisons of a conjectural nature that relate outcomes from coordinated actions to a presumption of what would have happened in their absence. This is clear, for example, in the statement that outcomes typically associated with actions agreed at the 1978 Bonn Summit would have taken place even in the absence of those actions (pp. 116–117).

Given the shortcomings of these various comparisons, it is acknowledged explicitly in the paper that the actual evidence that is available cannot be interpreted unambiguously; in the author’s own words, “ad hoc policy coordination has not only been rare up to now but, when accomplished, the observed effects were far from clear” (p. 128). Therefore, the paper also examines evidence derived from econometric model simulations conducted under the sponsorship of the Brookings Institution (see Bryant and others (1988)). In analogy with other studies that had considered this evidence earlier, the paper remarks that the simulations show that the effects of policy interactions appear to be relatively small (see, in this context, Fischer (1987)) or that they are possibly too varied in magnitude and even in sign to provide a basis for coordinated action (see Tanzi (1988)).

At present, therefore, perhaps a position of agnosticism on the record of policy coordination may be the appropriate one to adopt. This has also been a conclusion reached recently (though with some reluctance) by Ralph Bryant when he wrote: “While acknowledging that agnosticism is the only defensible conclusion for the moment, I thus still incline somewhat toward the view that the gains potentially realizable through cooperation (consultation and coordination) are worth writing home about” (Bryant (1987)). But then, we need to be specific about what we mean by coordination. Clearly exchange of information and consultation among countries are important elements for the process of national policy formulation, as properly stressed in the conclusions of Groβer’s paper. That there are “trade” gains to be derived from information flows is generally well recognized.

But should coordination go beyond the stage of consultation and exchange of information? In particular, should countries be asked or expected to adapt their domestic policies in response to objectives agreed with other countries or, more broadly, to move toward joint policy implementation to attain those agreed aims? Views vary widely on these questions. Arguments against going too far in this direction have been advanced on a variety of grounds: as already noted, it has been contended that the smallness of the gains likely to be obtained through coordination is hardly worth the effort; it has also been said that coordination is improbable as long as differences of view prevail regarding the transmission mechanism from policy instruments to policy aims (or, as the paper puts it (p. 130), as long as there is “disagreement on how the world actually works”) as well as differences on the policy objectives to be pursued; and it has been pointed out that the cost of negotiating and policing coordinated actions may exceed their benefit. Against all these arguments, the fundamental proposition remains that the presence of externalities establishes a presumption in favor of cooperative decisions, a presumption that is behind many of the cases made in favor of policy coordination.

Differences of views also characterize the growing number of assessments of summit outcomes. Perhaps the clearest example yet is provided by the 1978 Bonn Summit and the so-called locomotive approach to international policy coordination, although it could be said that the more recent Louvre Accord is providing some competition in this respect. In common with conceptual arguments, differences in empirical assessments of coordination are not amenable to single or categorical solutions. To some observers, the 1978 Bonn Summit is an illustration of constructive coordinated action (see, for example, Bryant (1987)). For many others, however, this summit was clear evidence of the shortcomings of “fine tuning” as an approach to macroeconomic management at the international level (see, for instance, Haberler (1987)). In this context it must be noted that, as Groβer points out in his paper, criticisms of this sort seem to be directed more to such an approach to macroeconomic policy than to the concept of policy coordination per se.

Here again, the various interpretations given to the sequence of events that followed the 1978 Bonn Summit underscore the validity of Groβer’s findings concerning the difficulties of distinguishing policy coordination from less intensive forms of cooperation—or even, I would say, from well-informed national policymaking—as well as those that arise from the scarcity and limited reliability of the information yet available to assess the effects of policy coordination. Some of the general issues that are raised in the paper are nevertheless fundamental, if only because some measure of coordination is inevitable in any interdependent system consisting of independent components.

On the international economic sphere, an important measure of (commonly agreed, or indeed should we say coordinated?) progress has been made for several decades now to open up and integrate national economies into a global system. As a result, the system at large has become closely interdependent and self-contained; therefore, it confronts an “nth country problem,” the resolution of which calls either for clear rules, or for an exercise of discretion, or for a regime that balances rules and discretion so as to make the system compatible or internally consistent (Horne and Masson (1988)).

Illustrations of “rule-based” systems are, of course, the Bretton Woods par value regime that prevailed until the early 1970s and, presently, the European Monetary System (see Guitián (1988)). Such systems are to a large extent self-enforcing in nature so that policy coordination becomes endogenous, so to speak, because when policies become incompatible with the operation of the system, the rules typically point in a relatively unambiguous manner to the need for policy adaptation. This basic characteristic is stressed in Groβer’s paper where, in the context of the EMS, it is noted that “international monetary rules can work as a substitute for coordination of economic policies” (p. 113).

The flexible exchange rate arrangements that currently characterize the international monetary regime fall more within the pattern of “discretion-based” systems, a context in which both calls for and impetus toward policy coordination inevitably surface. This is also clearly acknowledged by Groβer when he writes: “The rise of international policy coordination as a new instrument was promoted by the transition to a regime of flexible exchange rates” (p. 111). As he argues, the broader scope for discretionary national actions, by increasing uncertainty and the likelihood of inconsistencies, contributed to the demand for coordination.

The analysis and the evidence discussed in the paper suggest that there are themes in discussions of national economic policymaking that should find more of an echo at the international level. One of them has already been referred to in the context of the 1978 Bonn Summit, that is, the appropriateness (or lack thereof) of fine tuning as an approach to macroeconomic policy; in this regard, I think that Groβer’s general warning that such an approach at the international level is subject to as many pitfalls as at the national level, cannot be more opportune. Another related theme concerns the dimensions of policy that are desirable to emphasize at a particular time. For example, should policies be predictable or should they be adaptable? Rule-based systems—which focus on interdependence—stress predictability; in contrast, discretion-based systems—which are concerned with independence—emphasize adaptability. Where is the balance to be drawn? Either extreme is clearly inadvisable: predictability cannot be taken to mean total policy immobility regardless of circumstances; but neither can adaptability be taken to the point where policy direction loses its meaning.

The basic question lies around the balance to be given to national and international considerations in domestic policymaking. A concrete illustration of this question is provided in the paper’s discussion (pp. 126–27) of the dominant factors behind policy decisions in the last two years or so, where national considerations are described as the policy movers in the United States while the requirements of coordination (international considerations) are seen as the factors behind the policy actions in surplus countries (the Federal Republic of Germany and Japan). The likelihood of attaining a proper balance on these issues increases with the availability of information; hence, the general agreement on the desirability of exchange of views and consultations at the international level. But balance will also require a measure of consensus on objectives and priorities which obtains only rarely; hence, the divergence of views on the desirability of policy coordination.

As in many other economic policy areas, I believe the issues here involve intertemporal choices nationally as well as internationally. The choices are rarely straightforward and in their evaluation it is important to acknowledge at the outset the limitations that characterize policy coordination as well as those that confine policy autonomy. After all, pursuit of global economic objectives, even if they have been internationally agreed, cannot be expected to persist if it conflicts with or runs counter to domestic aims and priorities; correspondingly, the pursuit of domestic objectives that run counter to or conflict with those sought elsewhere cannot be sustained indefinitely. From this dual perspective, the choice is not whether or not to coordinate but, rather, how to do so. Clearly it would be unrealistic to expect coordination to be based solely on what a country can do for others. On the contrary, the argument should center instead on the areas of coincidence between national and international interest, which are often broader than generally thought. This said, however, perhaps we should take a sequential view of coordination along the following lines. First, attainment of the “Fischer standard” (Fischer (1987))—that is, let each country do its best “to keep its own economy in shape.” This stage would permit governments to establish a reputation with respect to their ability to coordinate economic policies domestically, this being in itself no mean endeavor. Within this general desideratum, a basis can then be established to set up a system whereby intertemporal choices can be clarified so that a global set of objectives and priorities can be determined as a commonly agreed aim for internationally coordinated policy action, that is, establish a basis from which reputations for domestic policy coordination can acquire an international dimension. In this respect, it must be stressed that coordination is no substitute for appropriate national policies.

Papers like Groβer’s, by clarifying choices and examining policy impacts, lay down stepping stones in the road toward international cooperation. They thus provide grounds for further progress to be made toward policy coordination based on an enlightened balance of national and international considerations.

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1

See Cooper (1986), p.5.

2

See Frankel (1987), p. 1.

3

For a review of types of coordination see Horne and Masson (1988).

4

See Solomon (1984), p. 12–13.

5

Nonparticipants are Greece, Portugal, Spain, and the United Kingdom.

6

See Pöhl (1987). Section VI.

7

See De Grauwe (1986), p. 26.

8

See Ungererand others (1986), p. 27.

9

See Horne and Masson (1988), pp. 275–79, and Scheide and Sinn (1987), pp. 21–23.

11

See OECD, Economic Outlook 24 (December 1978), p. 17. Gebert and Scheide (1980) point out that models did not reflect recent changes in important conditions connected, for example, with flexible exchange rates, and they supposed that the impact on production was overestimated.

14

See Pöhl (1987), Section IV.

15

See Monetary Policy Report to the Congress, submitted on February 19, 1987.

16

For the crucial role of fiscal policies for the world interest level as well as for dealing with current account imbalances see Genberg and Swoboda (1987b). Mansur (1988) also takes into account the relation to private sector savings.

17

The interpretation of observed changes in government financial balances is difficult because of influences from special factors.

18

See OECD Economic Outlook 42 (December 1987), p. 89.

19

However, the results may be reversed in the medium term. See, for example, the results of the Federal Reserve Board’s Multi-Country-Model for the impact of fiscal expansion over six years, shown by Tanzi (1988), p. 41, from Edison and Tryon (1986). The cumulative impact of a permanent increase of U.S. real government expenditure of 1 percent is estimated at 1.8 percent of U.S. GNP in the second year, falling to 0.1 percent in the sixth year, whereas the cumulative impact on foreign GNP rises from 0.7 percent to 1.0 percent.

20

Further average changes were calculated by Fischer (1987) for consumer price indices, interest rates, and exchange rates.

22

The evaluation took into consideration studies of Oudis and Sachs (1984), McKibbin and Sachs (1985, 1986), Taylor (1985), and Canzoneri and Minford (1986). See Home and Masson (1988), pp. 286–87.

23

See Cooper (1986), p. 9.

24

Levine and Curry (1987) point to the influence of assumptions on the credibility of governments vis-à-vis their private sectors. Ghosh and Masson (1988) focus on the question whether policymakers take account of the presence of model uncertainty in choosing their optimal plans. If they do, gains from coordination are expected to increase considerably.

25

See Matthes (1987), p. 309.

1

The views expressed in the paper are those of the author and not necessarily those of the International Monetary Fund.