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

See all articles by Jeffry Frieden

Jeffry Frieden

Harvard University

J. Lawrence Broz

University of California, San Diego (UCSD) - Department of Political Science

Date Written: March 2, 2012

Abstract

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

Frieden, Jeffry and Broz, J. Lawrence, The Political Economy of International Monetary Policy Coordination (March 2, 2012). The Encyclopedia of Financial Globalization, Gerard Caprio, ed., Elsevier Publishing Inc., 2012. Available at SSRN: https://ssrn.com/abstract=2222828

Jeffry Frieden

Harvard University ( email )

1737 Cambridge Street
Cambridge, MA 02138
United States

J. Lawrence Broz (Contact Author)

University of California, San Diego (UCSD) - Department of Political Science ( email )

9500 Gilman Drive
Code 0521
La Jolla, CA 92093-0521
United States

HOME PAGE: http://pages.ucsd.edu/~jlbroz/

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