The Political Economy of International Monetary Policy Coordination
The Encyclopedia of Financial Globalization, Gerard Caprio, ed., Elsevier Publishing Inc., 2012
29 Pages Posted: 24 Feb 2013
Date Written: March 2, 2012
The economic rationale for international monetary policy coordination is not strong. This is the conclusion, not only of the traditional Mundell-Fleming literature, but also the more recent New Open-Economy Macroeconomics literature on international monetary coordination. Yet a broader political economy approach illustrates that national currency policy can in fact impose non-pecuniary externalities on partner nations. This is especially the case with major policy-driven misalignments, which cannot easily be countered by other governments. For example, one country’s substantially depreciated currency can provoke powerful protectionist pressures in its trading partners, so that exchange rate policy spills over into trade policy in potentially damaging ways. Inasmuch as one government’s policies create these sorts of costs for other countries, and for the world economy as a whole, there is a case for global governance. This might include some institutionalized mechanism to monitor and publicize substantial currency misalignments.
Keywords: International monetary coordination, International Monetary Fund, IMF, trade protection
JEL Classification: F02, F30, F40, F42
Suggested Citation: Suggested Citation