Obstacles to International Policy Coordination, and How to Overcome Them

Staff Discussion Notes, December 12, 2013

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In bilateral and multilateral surveillance, countries are often urged to consider alternative policies that would result in superior outcomes for the country itself and, perhaps serendipitously, for the world economy.
Existing policies may be the best that countries can deliver given various constraints, including political constraints.
For policymakers to be able and willing to implement better policies, some quid pro quo may be required—such as a favorable policy adjustment in the recipients of the spillovers; identifying such mutually beneficial trades is the essence of international policy coordination.
Four general guideposts are proposed for searching for globally desirable solutions.

Guidepost 1: All parties need to identify the nature of spillovers from their policies and be open to making adjustments to enhance net positive spillovers in exchange for commensurate benefits from others.
Guidepost 2: With countries transparent about the spillovers as they see them, an honest broker is likely to be needed to scrutinize the different positions, given the inherent biases at the country level.
Guidepost 3: Given the need for policy agendas to be multilaterally consistent, special scrutiny is needed when policies exacerbate global imbalances and currency misalignments.
Guidepost 4: Special scrutiny is also needed when one country’s policies have a perceptible adverse impact on financial-stability risks elsewhere.

Cross-border effects and policy spillovers are central considerations.
Financial sector risk and financial-stability spillovers warrant particular attention.
Global imbalances and currency misalignments require multilateral consistency in policy agendas.
Political constraints and country-level biases can impede adoption of globally superior policies.
The search for mutually beneficial trades (quid pro quo adjustments) is essential for effective coordination.