The Elusive Gains from Nationally Oriented Monetary Policy

According to one of the most striking results in the recent open macro literature, the gains from international monetary cooperation are negligible. We show that when assessed conditionally on empirically relevant dynamic developments of the economy, the welfare cost of moving away from regimes of explicit or implicit cooperation may rise to multiple times the cost of economic fluctuations. Divergent economic conditions compound the policymakers’ incentives to act non-cooperatively. Under incomplete markets, these incentives are driven by the emergence of global imbalances, i.e., large net-foreign-asset positions; under complete markets, by divergent real wages.