Attempts to coordinate economic policies internationally are based on the intuition that accounting for interactions between national econo- mies should improve the performance of all involved if not by the `locomotive' effects of increased trade, then at least by eliminating beggar-thy-neighbour policies and competitive currency depreciations. The 1980s have seen greater academic attention to coordination and practical interest in exchange rate targeting and monetary coordination. The usefulness of much academic analysis has been limited, however, by being highly stylized and by coordinated policies' sensitivity to shocks, poor information or disagreements about how economies work. In Discussion Paper No. 325, Gerald Holtham and Research Fellows David Currie and Andrew Hughes Hallett review the case for coordination in the light of what policy-makers have actually achieved and the findings of the academic literature.
Currie, Holtham and Hughes Hallett begin by evaluating the experience of coordination. Policy-makers' commitment to coordination in the postwar period has varied from periods with fixed exchange rates and no capital mobility to others with flexible exchange rates and capital mobility, and from periods with explicit discretionary coordination to periods with little attempt to coordinate. The authors distinguish between relative coordination, concerned with the interactions between countries, such as exchange rates and trade balances, and absolute coordination, which is concerned with the overall performance of the leading countries and the whole stance of fiscal and monetary policies. They argue that policy-makers have revealed a preference for relative coordination, while interest in absolute coordination has varied with economic circumstances.
The authors then review the potential benefits and costs identified in the academic literature. They note that possible levels of coordination range from just exchanges of information to full cooperation across all targets and policy instruments. The gains from coordination appear to accrue from several sources; even limited cooperation over exchanged information and simple policy rules, such as exchange rate agreements, appear to yield substantial gains, while the gains from moving to full coordination may be quite small.
Just as important, however, are the obstacles to successful coordination. Currie et al emphasize doubts about the sustainability of coordinated policies, the impact of information uncertainty and disagreement over how economies work. Though it is comparatively easy to say that coordination should help, it is much more difficult to design policies which will deliver those gains in practice. The authors finish by considering what forms of coordination are more likely to work in practice. They focus on systems intended principally to promote relative coordination, based on quite simple rules such as a flexible, target zone type of exchange rate regime. Though not free of the design problems associated with coordination, the authors argue that further evolution of the international monetary system in this direction is both desirable and inevitable

The Theory and Practice of International Policy Coordination: Does Coordination Pay?
David Currie, Gerald Holtham and Andrew Hughes Hallett

Discussion Paper No. 325, July 1989 (IM)