Model Uncertainty, Learning, and the Gains from Coordination

38 Pages Posted: 15 Feb 2006

See all articles by Atish R. Ghosh

Atish R. Ghosh

International Monetary Fund (IMF) - Policy Development and Review Department

Paul R. Masson

International Monetary Fund (IMF) - Research Department; The Brookings Institution

Date Written: December 27, 1988

Abstract

The paper considers gains from international economic policy coordination when there is uncertainty concerning the functioning of the world economy, but also learning about the "true" model on the part of policymakers. The paper reports estimates of plausible alternative versions of a standard, two-country model. Activist policy (either coordinated or uncoordinated) may produce large welfare losses in the absence of learning, if policymakers believe in the wrong model; hence exogenous money targets and freely flexible exchange rates may be best. However, model learning (from observations on macroeconomic variables) causes coordinated policies to dominate activist uncoordinated policies or exogenous money targets.

JEL Classification: 0260, 4200, 4310, 4320

Suggested Citation

Ghosh, Atish R. and Masson, Paul R., Model Uncertainty, Learning, and the Gains from Coordination (December 27, 1988). IMF Working Paper, Vol. , pp. 1-38, 1988. Available at SSRN: https://ssrn.com/abstract=885141

Atish R. Ghosh (Contact Author)

International Monetary Fund (IMF) - Policy Development and Review Department ( email )

700 19th St. NW
Washington, DC 20431
United States

Paul R. Masson

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

The Brookings Institution ( email )

1775 Massachusetts Ave. NW
Washington, DC 20036-2188
United States
202-797-6278 (Phone)
202-797-2968 (Fax)

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