Coordination of Monetary and Fiscal Policies in the Industrial Economies
By Warwick J. McKibbin and Jeffrey D. Sachs
in International Aspects of Fiscal Policies
Edited by Jacob A. Frenkel
The volatility of the world economy since the breakdown of the Bretton Woods par value system of exchange rates has led many pol- icymakers and economists to call for reform of the international mon- etary system. Many economists have argued that domestic macroeco- nomic policies in the major OECD economies should be geared, at least in part, to maintaining exchange rates within ranges set cooperatively among the major countries. Proposals vary from the “target zone” system, as advocated by Williamson (1983) and Roosa (1984), to a much more stringent system of fixed exchange rates, as advocated by McKinnon (1984). There are several possible arguments in the case for a return to a more managed system, as described in recent surveys by Obstfeld (1985) and Sachs (1985b). One crucial argument has been that the equilibrium of noncooperative macroeconomic policymaking under flexible exchange rates is likely to be inefficient, as countries fail to take into account the external effects of their policies on their trading partners. More rigid rules of the game, as embodied in a managed exchange rate system, are seen as a way to reduce the inducements to beggar-thy-neighbor policies. It has been frequently noted that there are many institutional forms that greater cooperation might take, rang- ing from the give-and-take of bargaining at economic summit meetings …