DP1180 Designing Institutions for International Monetary Policy Coordination

Author(s): Atilano Jorge Padilla
Publication Date: May 1995
Keyword(s): Coordination, EMU, Institutions, Majority Voting, Mechanism Design, Monetary Unions, Open Economy, Strategic Conflict
JEL(s): D78, E61, F42
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1180

In this paper we study the adjustment of a N-country world economy to an unfavourable common supply shock. We show that world-wide monetary policy coordination is essential to achieve an optimal adjustment to the common shock, but that its actual implementation requires careful design to ensure that each country finds it optimal to join and to remain faithful to the coordination agreement. We then construct alternative coordination mechanisms which implement the first-best response to the common shock, discuss their main properties and rank them according to different criteria of desirability.