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Model Uncertainty. Learning, and the Gains from Coordination
Author:
International Monetary Fund
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Series:
IMF Working Papers
Volume/Issue:
Volume 1988: Issue 114
Language:
English
Publication Date:
01 Jan 1988
DOI:
https://doi.org/10.5089/9781451943146.001
ISBN:
9781451943146
ISSN:
1018-5941
Pages:
38
Keywords:
WP; policy intervention; policy regime; policy coordination; Nash equilibrium; policy experiment; exchange rate; optimal policy; policy choice; policy rule; policy coordination experiment; Nash regime; model III; Exchange rates; Inflation; Monetary base; Floating exchange rates; Demand for money; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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The paper considers gains from international economic policy coordination when there is uncertainty concerning the functioning of the world economy, but also learning about the “true” model on the part of policymakers. The paper reports estimates of plausible alternative versions of a standard, two-country model. Activist policy (either coordinated or uncoordinated) may produce large welfare losses in the absence of learning, if policymakers believe in the wrong model; hence exogenous money targets and freely flexible exchange rates may be best. However, model learning (from observations on macroeconomic variables) causes coordinated policies to dominate activist uncoordinated policies or exogenous money targets.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund