International economic interdependence has attracted rapidly growing interest from both policy-makers and economic model-builders. Theoretical and empirical studies have examined spillover effects among the G7 countries as well as between them and the less developed regions of the world economy. Second, different policy rules and targets for domestic fiscal and monetary policies have been evaluated in the context of empirical models that take account of international interdependence. One aspect of this research deals with the performance of different exchange rate regimes. Third, there is a growing literature on the welfare implications of policy coordination and the difficulties involved in coordinating domestic macroeconomic policies. The practical and institutional problems of policy coordination have also drawn attention, including the experience of exchange rate systems such as the European Monetary System, and the role international institutions could play in the implementation and surveillance of policy coordination.
These topics were explored further in the conference on `Macroeconomic Policies in an Interdependent World', held in Washington DC on 12/13 December 1988, jointly sponsored by the Brookings Institution, CEPR and the International Monetary Fund. The conference was the final event of a three-year joint programme of work by CEPR and Brookings on `Macroeconomic Interactions and Policy Design in Interdependent Economies'; financial support for the programme and for the conference was provided by the Ford Foundation and the Alfred P Sloan Foundation.

Policy Rules to Guide Coordination
The first paper, `Policy Analysis with a Multicountry Model', by John Taylor (Stanford University), examined the properties of different monetary policy rules under different exchange rate regimes. Using an estimated multi-country model, Taylor assessed alternative choices of targets for simple feedback interest rate rules. Nominal wages were assumed to be sticky and to adjust according to a staggered contracts model. Output in each region converged in the long run to the exogenous level of potential output; fiscal policy was also exogenous, so monetary policy was the only effective instrument of stabilization policy. The model featured time-varying risk premia in both the uncovered interest parity condition and the long/short interest rate differential, and forward-looking behaviour in many behavioural relationships.
Taylor conducted his policy evaluation exercises in the light of the actual shocks to the world economy over the period 1972-86. Given the statistical properties of the shocks experienced, he found that a flexible exchange rate system performed better than a fixed exchange rate system, in terms of stabilizing domestic price and output levels in the G3 countries. This result held even with the beneficial effects of a fixed exchange rate regime on the perceived risk premia in the exchange rate equations. The simulations also revealed that a `mixed' price/real output rule for monetary policy was generally more effective in stabilizing G3 prices and output than a `pure' rule based on price or nominal GNP.
Manfred Neumann (University of Bonn) was concerned that Taylor's analysis depended on the assumption that exogenous shocks to the world economy in future would follow the same statistical distribution as in the turbulent period of the 1970s and early 1980s. Furthermore, the export and import functions, which were estimated over a period of flexible exchange rates, might be different under a fixed exchange rate regime. Ralph Tryon (IMF) suggested that data obtained over periods of fixed rates may be used to assess the significance of this problem; he also found Taylor's results in conflict with those of other researchers, perhaps because of the trade equations. Marcus Miller (University of Warwick and CEPR) and David Vines (University of Glasgow and CEPR) pointed out that the results to a large extent reflected the treatment of fiscal policy as exogenous under fixed nominal exchange rates. Stanley Black (University of North Carolina) argued that asset substitutabilities may change across policy regimes, and that the model should allow for this. Willem Buiter (Yale University and CEPR) argued that Taylor's results would also probably change if the government were worried about the inflation rate rather than the price level. Furthermore, once asset dynamics are included, it becomes unsatisfactory to continue to assume that fiscal policy is exogenous throughout the policy experiments. Taylor acknowledged the problem of assessing the performance of fixed exchange rates using data obtained during a period of flexible exchange rates. On the other hand, the distribution of shocks and the degree of economic integration via trade would not change immediately upon the adoption of a fixed rate system, so his result that macroeconomic performance would deteriorate in the short run was still plausible.
The next paper, on `Implications of Policy Rules for the World Economy: Results from the MSG2 Model', was by Warwick McKibbin (Reserve Bank of Australia) and Jeffrey Sachs (Harvard University and CEPR). Using their own MSG2 econometric model they investigated what policies could solve the current trade imbalances in the world economy, and what policy rules could be adopted to avoid recurrence of such problems. One of the features of their model is that fiscal and current account imbalances affect asset stocks, so full stock equilibrium is required in the long run. The model also incorporates rational expectations in asset markets and (partially) in the behaviour of households and firms. It has `Keynesian' short-run properties, however, because it assumes slow adjustment in nominal wages in most regions; in keeping with existing empirical evidence, the degree of stickiness varies considerably among regions.
The analysis revealed that a reduction in the US fiscal deficit would not be as deflationary as some observers predict, since it would be offset by lower long-term interest rates in the US and elsewhere after the announcement of fiscal contraction. But a small cut in the fiscal deficit may not by itself be sufficient to close the US trade deficit by 1993.
McKibbin and Sachs also examined the properties of a number of different policy `regimes': sets of rules governing the domestic monetary and fiscal policies of the G3 countries. They find some instability associated with the `blueprint' proposal advanced by Williamson and Miller (targeting real exchange rates using monetary policy, with fiscal policy used to target domestic demand). This may arise from fixing the real exchange rate once and for all in the model simulation, and the fact that the MSG2 model allows for debt accumulation.
Patrick Minford (University of Liverpool and CEPR) pointed out that although the model relied on intertemporal maximization for much of its structure, this seemed to contradict the assumptions of a high degree of wage stickiness in some regions, with hysteresis effects as well. Minford also doubted the result that the recessionary effects of US fiscal contraction could be easily offset by monetary expansion in the G3 countries, attributing this to McKibbin and Sachs's built-in transmission effects for monetary policy, even when fully anticipated by the private sector. David Currie (London Business School and CEPR) suggested that the instability properties of the `blueprint proposal' may be due to instrument instability. There are dangers in using targets precisely (fine-tuning), and the McKibbin-Sachs implementation differs from that advocated by Williamson and Miller, who argue for the use of policy in a `coarse-tuning' way. Currie also pointed out that one cannot fix the real exchange rate once and for all if asset stocks change. Willem Buiter argued that any model that incorporates an intertemporal budget constraint needs two separate fiscal instruments, such as government spending and taxation policy. One of these could then be assigned to target the solvency requirement and the other to meet real exchange rate targets. McKibbin agreed with the caveats regarding the `blueprint proposal' results. But he did not accept criticism of wage-setting in his model as ad hoc, since other rigidities are present so that, for example, the determination of consumption and investment does not depend solely on intertemporal optimization.
Jacob Frenkel (IMF), Morris Goldstein (IMF) and Paul Masson (IMF) then presented `Simulating the Effects of Some Simple Coordinated Versus Uncoordinated Policy Rules'. They evaluated how diff erent simple monetary and fiscal rules perform in MULTIMOD. This model includes forward-looking expectations and is a full, closed model of the world economy, in contrast to other global models. The authors distinguished between uncoordinated policies, which include policy rules under which each country targets monetary policy on either the monetary base or nominal GNP; and coordinated policies, in which monetary policy is targeted to real or nominal exchange rates, or monetary and fiscal policy target both real exchange rates (or the current account) and nominal domestic demand. Rather than `rerunning' historical simulations with different policy rules, Frenkel et al. simulated the model for a future period by applying to the baseline of the model shocks drawn from the actual historical distribution of disturbances, and then examining how successful each rule is at minimizing the deviations of the target variables from the baseline. This procedure allowed multiple simulations to be carried out by selecting a new set of shocks from the distribution. The results did not suggest a clear ranking of different policy rules. For instance, the choice among the two uncoordinated rules (money supply and nominal GNP targets) and a fixed exchange rate rule was not clear-cut. Second, although Williamson and Miller's `blueprint' proposal tended to work well in stabilizing key target variables, the authors were sceptical about the flexible use of fiscal policy which it implied. Third, pursuing target zones with the use of monetary policy alone or making the response of fiscal policy less flexible tended to produce instability, probably due to the relatively powerful effect of fiscal policy in the model.
Jeffrey Shafer (OECD) suggested that the authors found it difficult to discriminate between the performance of different rules because they all performed reasonably well. Real policies do not work quite as well, however, so perhaps the authors' methods of assessing different rules may be optimistic. Shafer also proposed considering the effects of model uncertainty on the results. Stanley Fischer (The World Bank) suggested that one way of overcoming instrument instability was by setting a loss function which penalized extreme policy settings. He also pointed out that the paper concentrated on policy rules for the interest rate, even though monetary policy appeared less effective than fiscal policy. David Currie pointed out that one way to resolve instrument instability is by using integral control in addition to proportional rules. One can easily design robust simple rules using control techniques. Marcus Miller argued that exchange rate `fads' may depend on the regime in operation, and this should be recognized in the authors' analysis. In reply, the authors agreed that sensitivity exercises were important, but suggested that their results were not nihilistic. The results revealed the powerful effects of fiscal policy, and one important aspect for further investigation was how fiscal policy would operate if it were not totally flexible.

North-South Interactions
A paper on `Macroeconomic Interactions Between the North and South' was presented by Anton Muscatelli (University of Glasgow) and David Vines (University of Glasgow and CEPR). They argued that the spillover effects between North and South should be taken into account when discussing Northern policy proposals. Muscatelli and Vines analysed the main channels of economic interdependence with a theoretical simulation model whose properties were then compared to those of an empirically based model with an LDC sector, the IMF's MULTIMOD. The authors emphasized the linkages that relate to the demand-side effects of Northern policies, which may feed back on commodity prices and affect the North's own supply sector. Furthermore, any effect of Northern policies on Southern capital accumulation will have a long-run effect on commodity prices. The determinants of investment in the South and the determinants of financing flows from North to South warranted specific empirical investigation. Muscatelli and Vines's results indicated that policy coordination is probably desirable for both regions. A coordinated policy package would involve maintenance of a satisfactory policy environment in the G7 countries, implementation of satisfactory adjustment policies in the South, including increased investment expenditure, and resumption of new financing flows to the South.
Michael Dooley (IMF) pointed out that Muscatelli and Vines assumed that additional finance is readily available to the South at an interest rate that incorporated a risk premium, while in MULTIMOD, no more finance is available to countries who do not satisfy a solvency criterion. Dooley found the latter approach more realistic: the flow of new finance to the South seems to have dried up, and the large market discounts on the debt of some LDCs probably do not affect the level of Southern investment. Pierre Defraigne (Commission of the European Communities) agreed with the authors that the South is an important `missing link' in the modelling of economic interdependence, but proposed adding two features to the model. First, the authors should recognize that the share of manufactures in Southern exports had risen to 52% by 1982; the authors neglected trade barriers in their discussion of policy cooperation. Second, in empirical work, the building of a multi-regional model should recognize the strong bilateral links between particular Northern and Southern regions (e.g. Japan and the Asian NICs). William Hood stressed the heterogeneity of both North and South. Anthony Latter (Bank of England) said it had to be demonstrated why the North should want to cooperate on policy matters except for altruistic reasons. Peter Kenen (Princeton University) and Ralph Bryant (The Brookings Institution) asserted that the North should be motivated by self-interest given the presence of large spillover effects from the South to the North. Patrick Minford asked whether we really needed North-South models, and how they differed from North-North models. Vines replied that the degree of specialization in production, the presence of financial constraints and wage-setting asymmetries made the distinction useful. Muscatelli pointed out that any problems of heterogeneity among different Southern regions could be resolved at the empirical level. Furthermore, he argued that small theoretical models are still useful in identifying the role played by the main channels of interdependence, even if there is a danger of over-simplifying.

Target Zones
The last paper of the first day, on `The Stabilizing Properties of Target Zones', was presented by Marcus Miller (University of Warwick and CEPR), Paul Weller (University of Warwick and CEPR) and John Williamson (Institute for International Economics). They examined how target zones cope with shocks originating from the private sector in the exchange rate market, in the presence of two types of inefficiencies in the exchange rate market: Blanchard `bubbles' and currency `fads'. Provided the authorities choose the target zone to encompass the equilibrium exchange rate, the authors showed that target zones can have a deterrent effect where bubbles are present. In the presence of `fads', the adoption of a target zone may encourage smart money to play a stabilizing role in exchange rate markets.
Michael Mussa (University of Chicago) argued that if the authors saw target zones as a deterrent for Blanchard bubbles, then there is no reason to propose a narrow target zone, as any announced limit on exchange rate fluctuations will do. Furthermore, Mussa doubted whether the presence of `fads' could explain the behaviour of the dollar during the early 1980s, as the authors suggested, because in their model a high dollar would have had to coincide with a high interest rate and with an economy in recession: this did not occur in practice. As a result, the model yielded some rather perverse policy prescriptions. James Boughton (IMF) pointed out that the policy-maker would have to distinguish how far currency fluctuations were due to fundamentals and how far `bandwagon effects' were important.
David Currie suggested that target zones could be adjusted in the light of future developments, but Jeffrey Shafer replied that if there were no absolute precommitment to given target zones at the start, then market inefficiencies might not be eliminated as smoothly as Miller et al. suggested. Peter Kenen suggested that one possible way of restricting speculative pressures would be to focus on narrow bands for nominal exchange rates. Miller, Weller and Williamson pointed out that they had not attempted to provide an actual account of the dollar in the early 1980s, but only advanced theoretical arguments on how target zones would help cope with possible market inefficiencies. The EMS could be used as an illustration of how exchange rate bands could work in practice, with rapid changes in interest rates taking the sting out of speculative pressures.

European Monetary Unification
The second day began with the presentation by William Branson (Princeton University and CEPR) of a paper on `The Exchange-Rate Question in Europe', by Francesco Giavazzi (Università di Bologna and CEPR). Giavazzi examined the possible evolution of the European Monetary System beyond its present form of fixed but adjustable parities. Many believe that the abolition of capital controls will put pressures on the EMS that will force it back towards greater exchange rate flexibility or towards permanently fixed parities. Giavazzi examined the arguments for and against such monetary unification. Permanently fixed rates would eliminate the incentive to use `beggar-thy-neighbour' policies but it may be desirable to retain the ability to realign EMS parities when all countries face common shocks but have structural asymmetries. Moreover, in a fixed rate system, if monetary policy is set by the least inflation-prone member of the group, other countries lose monetary sovereignty. This may create problems for countries whose fiscal structures involve a large ratio of money financing to tax revenues.
Branson pointed out that moving towards permanently fixed rates required detecting the appropriate rates on which to fix. This was particularly important with the present large and growing German current account surplus. He also highlighted the difficulty of instituting fiscal transfers between regions in the absence of a fully integrated European fiscal system. Moreover, the development of an integrated financial system will have important implications for small firms in each region, who do not have access to centralized bond markets for finance. Mario Draghi (The World Bank) argued that the present system would be able to survive under perfect capital mobility, so long as individual regions did not attempt to carry out independent monetary policies. He also pointed out that constraining some countries' banking systems to hold greater reserve requirements would place them at a disadvantage at a time of increased competition.

`The European Monetary Union: An Agnostic Evaluation', by Daniel Cohen (CEPREMAP and CEPR) and Charles Wyplosz (INSEAD and CEPR), also assessed arguments for and against EMU. `Non-strategic' considerations include the need for seigniorage by countries with inefficient tax systems, the desire of countries with large public debts to use surprise inflation to erode the public debt, and the possibility that the ECU would become an important foreign reserve asset. Cohen and Wyplosz concluded that these considerations did not yield a decisive verdict on EMU. They then examined the strategic issues underlying the arguments for fixed rates. Although an inflation externality points towards the efficiency of EMU, the authors argued that if another externality were introduced, for example the collective determination of the zone's balance of trade, the EMU yielded an inappropriate real exchange rate.
Massimo Russo (IMF) pointed out that EMU should be considered in part as the result of political moves. Furthermore, seigniorage should be viewed as a second-order effect, as the reduction of exchange-rate risk would probably compensate highly indebted countries for their loss of seigniorage. Alberto Giovannini (Columbia University and CEPR) agreed that seigniorage is probably a second-order issue but emphasized that convergence to a common inflation rate in the 1980s had produced interest rate increases and cyclical falls in taxation revenues, thus exacerbating the fiscal problem for some countries. He also stressed serious identification problems in Cohen and Wyplosz's empirical analysis of symmetric and asymmetric shocks.
Gerald Holtham (Shearson Lehman Hutton) pointed out that the behaviour of financial markets did not seem to bear out the argument that the EMS allowed some countries to `import credibility'. Richard Portes (CEPR and Birkbeck College, London) stressed the need for fiscal redistribution under EMU and found significant the rapid growth of EC `structural funds'. He also argued that seigniorage could be an important transitional problem, even if the longer-run magnitudes were small. Jacob Frenkel also saw the issue of fiscal transfers as paramount and queried whether the structural funds would suffice to meet this problem. David Vines pointed out that accepting the need for fiscal restructuring, including the co ordination of fiscal policies within the EC, made the prospect of EMU less realistic. Anthony Latter queried the contention that the EMS could not survive following the elimination of capital controls. Giorgio Basevi (Università di Bologna and CEPR) saw the emergence of the ECU as a reserve asset following EMU as being of some importance for the future of the US current account, given the likely depreciation in the dollar which would result.

Institutional Framework
Andrew Crockett (IMF) then presented his paper on `The Role of International Institutions in Surveillance and Policy Coordination'. The usual arguments in favour of coordination are that it eliminates the externality caused by spillover effects and supplies the public good of worldwide economic stability. Crockett outlined the development of efforts to underpin international economic cooperation. Under the Bretton Woods system, Working Party 3 of the OECD established procedures whereby countries exchanged information on balance of payments aims and forecasts. A report of this working party proposed the use of indicators to diagnose the emergence of imbalances and a set of guidelines on appropriate policy reactions.
Crockett then examined the working of policy cooperation under floating exchange rates. The `rules of the game' seemed imprecise, partly because of the difficulty of making clear prescriptions in a floating rate regime and partly because of the demise of the `Keynesian consensus' on the operation of macroeconomic policy. Thus a greater weight was placed on surveillance, another component of cooperation. This failed to prevent the emergence of the debt crisis in 1982 and the excessive dollar appreciation up to 1985. The period after 1985 has seen the strengthening of cooperation, partly in the regular meetings of the G7 and partly as a result of their undertaking to strengthen surveillance in conjunction with the IMF. Finally, Crockett analysed steps that could be taken to make the policy coordination process systematic rather than episodic and argued that the Fund will probably continue to play central role.
Sylvia Ostry (Department of External Affairs, Canada) suggested that Crockett's analysis of the process of coordination was optimistic. She stressed that there may be sharp differences in individual countries' views of the underlying model and the appropriate policy targets. Resolving these involved political processes. Ostry pointed out that Crockett's account omitted trade and the GATT, although it is arguable that the recent moves towards coordination were triggered by fears of increased protectionism. Jacques Polak (IMF) thought there were limits to the number of parties in the management of exchange rates, and that this was probably best conducted in the realm of the G5 or G7. There are other aspects to policy coordination, however, since exchange rate management has to be underpinned by fiscal and monetary policies. Furthermore, one should recognize the danger of any coordinated approach: it can lead to a struggle to determine each country's share of the burden of adjustment. Willem Buiter proposed applying public choice considerations to the study of policy coordination issues. The existence of international institutions is likely to have implications for the policy coordination games usually analysed by economists. Robert Solomon (The Brookings Institution) asserted that exchange rate stabilization in itself would not help achieve policy coordination unless there were to be a concerted attempt to improve macroeconomic performance in general. Ralph Bryant stressed the importance of the exchange of information in catalysing discussions on the state of the international economy and hence more coordination.

Effects of US Macroeconomic Policies
Ralph Bryant, John Helliwell (University of British Columbia) and Peter Hooper (The Brookings Institution and the Federal Reserve Board) presented their paper on `Domestic and Cross-Border Consequences of US Macroeconomic Policies'. They used simulations generated by a number of global macroeconometric models to yield evidence on the effects of fiscal changes in the US by displaying `model averages'. This involves obtaining averages and standard deviations of a `sample' of simulations obtained with the various models. The effects predicted by different models for particular US fiscal actions differ considerably, but the authors argued that the model averages offered useful guides to policy. First, an unanticipated cut in US government expenditure would have a substantial negative impact on US output, prices, interest rates, the value of the dollar, and the US trade deficit over a six-year horizon, although output would recover by the end of this period. Second, a temporary expansion in US monetary policy could offset the negative effect on US output caused by the fiscal contraction, but this would not offset any negative impact on foreign output. Third, if a fiscal contraction were anticipated and credible, this could bring forward the decline in interest rates and the dollar, offsetting some of the output reduction. Fourth, different fiscal actions could be undertaken to reduce the fiscal deficit by an equivalent amount, but increases in excise and corporate taxes would have a more damaging long-run effect on output than increases in personal taxes or reductions in transfers. Overall, the authors recommended the announcement of a gradual and credible US fiscal retrenchment incorporating personal tax increases or transfer decreases.
Haruhiko Kuroda (Ministry of Finance, Japan) argued that a US fiscal deflation might, by reducing the current account deficit and increasing confidence in the US economy, actually lead to an increase in the dollar's value by attracting foreign capital. David Begg (Birkbeck College, London, and CEPR) noted that the authors did not deal with issues of policy coordination but only with specific US policies; ignoring policy interactions may bias the results. He also noted that the horizon over which the models were simulated (5-6 years) was longer than the political horizon, which might be inconsistent with the importance of credibility in the analysis. Finally, Begg suggested that, in evaluating the output effects of diff- erent taxation policies, policy-makers may be just as interested in the composition of output as in the total. Ralph Tryon argued that the model averages obscured the underlying structure of individual models, thus ignoring the fact that any modelling exercise is a conditional experiment. Furthermore, `standard deviations' are difficult to interpret in this context. Vito Tanzi (IMF) pointed out that any inflationary consequences which the authors attributed to indirect taxation were likely to be short-lived, provided there was no monetary accommodation. William Cline (Institute for International Economics) thought the required reduction in the current balance would be hard to achieve with the authors' proposed policies. Patrick Minford pointed out that in countries where budget deficits have been cut, the results differed from those suggested by the paper because of large confidence effects; furthermore, the models used ignored supply-side effects. William White (Bank of Canada) and David Vines both highlighted the possible inflationary dangers of a dollar devaluation. The authors stressed that the averages should be seen as a useful way of characterizing the information. To some extent whether one chooses a given model or an `average of models' depends on whether one wishes to describe the workings of the economy or to conduct a forecasting exercise.

The Gains from Coordination
The final paper of the conference, entitled `The Theory and Practice of International Economic Policy Coordination: Does Coordination Pay?' was presented by David Currie (London Business School and CEPR), Gerald Holtham (Shearson Lehman Hutton) and Andrew Hughes Hallett (University of Newcastle and CEPR). Their account of the recent historical experience of policy coordination distinguished between absolute and relative policy coordination. The former is directed towards the overall stance of policy in the main industrial countries and tries to counteract shocks to the world economy as a whole. The latter is concerned with the interactions between countries and tends to focus on the exchange rate and balance of payments. The authors argued that relative coordination was the main concern during the Bretton Woods system, except insofar as the debate on aggregate world liquidity was addressed. Furthermore, the recent resurgence in policy-makers' interest in policy coordination appears to have been motivated by a perceived need for relative coordination following the US fiscal expansion in the early 1980s.
Currie, Holtham and Hughes Hallett then described the conclusions reached by economic analysis of the pay-offs from coordination. The authors outlined a number of possible levels of coordination, ranging from information exchanges to full policy cooperation across all policy targets and instruments. The gains to be achieved depend on the degree of coordination adopted; they accrue from a number of different sources and not solely from full cooperation, which recent empirical estimates have shown to yield small gains. On the other hand, even limited cooperation in terms of information exchanges may bring substantial gains in terms of more efficient `non-cooperative' policies. Other gains may come from the use of `shared targets' such as the exchange rate, of intermediate targets, and of common simple rules. Such gains may not be realized, however, if cooperative policies hit problems of sustainability, reputation, information errors or uncertainty over objectives and the underlying model. The authors concluded that information exchange is an important part of the cooperation process insofar as it improves the quality of non-cooperative outcomes. Second, the adoption of a rule-based system of coordination may lead to benefits in terms of credibility and reputation, especially if it is based on simple and robust rules. Third, exchange rate agreements could be seen as an important vehicle for policy cooperation generally, by avoiding mismatches in monetary and fiscal policies in the world economy.
Vito Tanzi pointed out that the gap between the rhetoric and practice of policy coordination may have been reduced by aiming at the less demanding goal of relative coordination; global demand management is not a realistic aim. Tanzi did not believe that reneging on agreements might be a problem. Sustainability is more likely to be impaired by policy-makers' problems in achieving total control over their policy instruments, and by a lack of political continuity. He saw precommitment to fiscal policy as rather more difficult than agreements on monetary policy and intervention in exchange rate markets. Finally, Tanzi pointed out that coordination is impaired by the unreliability of forecasts, especially if policies take a long time to implement. Jeffrey Frankel (Harvard University and University of California at Berkeley) stressed uncertainty as the main obstacle to coordination. Each country must believe that it stands to gain ex post in most states of the world. Commitment to an intermediate target may be bad ex post because of the different shocks impinging on the system. But an advantage in adopting an intermediate target is that it may be a means for policy-makers to gain reputation. This rule must be robust across a whole range of possible shocks, and Frankel disagreed with the authors' choice of the exchange rate as a good target, arguing instead that the main candidate should be nominal GNP. Holtham pointed out, however, that targeting of nominal GNP encountered long information lags.
Warwick McKibbin disputed claims that gains from cooperation were necessarily small. David Currie agreed, especially in view of feedback effects from the `South' or prolonged exchange rate swings. John Williamson challenged Vito Tanzi's aversion to absolute coordination, seeing dangers in not adopting a global target for nominal income growth. Currie stressed that sustainability is important not because policy-makers should be viewed as `dishonourable', but because they will not enter agreements which they know they cannot see through. He pointed out that forecast errors also created problems in policy-making for a single economy; there is no evidence that these problems become more acute in a multi-country context.
Earlier work in this field was mainly dedicated to the examination of spillover effects in particular theoretical models and to the rationalization of the gains from policy cooperation. In sharp contrast, the participants at this meeting witnessed the advances that have been made in recent years and the new momentum in the study of economic interdependence and international policy coordination. The focus is now on acquiring a deeper knowledge of the empirical working of the global economy, on the operation of simple monetary and fiscal rules in such an environment, on the appropriate exchange rate regime, and on the precise role played by international institutions.