International Finance

Third edition

by Keith Pilbeam

Chapter 14- International Policy Coordination

Chapter Introduction
For the majority of this text, we have confined our analysis to the study of a small open economy. By definition the policy measures taken by such an economy have no significant impact upon its trading partners. The small economy assumption is useful in that it makes it plausible to ignore possible reactions to its policies from trading partners. In the real world, however, the actions taken by one country will often have significant effects upon their trading partners. This means that the countries are interdependent and policy measures adopted by one of the economies may provoke a reaction from its trading partners that can reinforce, weaken or even offset its policy. Where such interdependence exists it is frequently argued that countries should consider coordinating their macroeconomic policies to avert the possibility of conflict and improve their positions as compared to pursuing unilateral policies.

In this chapter, we shall look at some of the major issues raised by the topic of international macroeconomic policy coordination. These issues include: What is meant by coordination of economic policies? Why does the need for international policy coordination arise? Is coordination always superior to non-coordination? What are the obstacles that prevent greater international coordination?