International Monetary Policy Coordination: Past, Present and Future

John B. Taylor

Stanford University

12th BIS Annual Conference, Luzern, Switzerland

June 21, 2013

Overview • Present: Many complaints about cross-border

monetary policy spillovers – calls for international monetary policy coordination

• Past: Contrasts sharply with 1980s, 1990s and until recently, which was… – Near an Internationally Cooperative Equilibrium (NICE)

• Much as theory predicted

– Non-Inflationary Consistently Expansionary (NICE) • a NICE system for a NICE time

• Future?

Explanation #1

Monetary policy deviations at some central banks led to policy deviations abroad • Examples • Global Great Deviation

– Hoffmann & Bogdanova (2012)

Source: Taylor (2007)

Housing Investment versus Deviations from Policy Rule in Europe During 2001-6

Source: OECD

0

1,000

2,000

3,000

4,000

5,000

2000 2005 2010 2015

Billions of dollars

9/11 /

Counterfactual withoutQE1, QE2,..

History

Two projections basedon the meaning of"substantail labormarket improvement" \

Old

New

Reserve Balances

Explanation #2

No policy deviations; policies are good. – Not beggar-thy-neighbor – Complaints are part of a move to easier policies – Don’t worry so much about interest rate

differentials or capital flows and controls.

Simple Monetary Theory of NICE • perfect capital mobility • a flexible exchange rate • staggered wage setting • domestic prices affected by

• domestic wages • price of foreign goods

• output influenced by • the real interest rate • the real exchange rate • foreign demand for exports

• demand for real money balances determined by • real income • nominal interest rate

• Simple rule for monetary policy in each country: • policy rate responds to aggregate prices

σy

σp σp

σy

Country 1 Country 2

A

B

σy

σp σp

σy

Country 1 Country 2

A

B A B

σy

σp σp

σy

Country 1 Country 2

1 2 3 4

Percent change from baseline

1 2 3 4

Percent change from baseline

Percent change from baseline

1 2 3 4

Empirical Support from Estimated Models…

-.1

.0

.1

.2

.3

.4

.5

III IV I II III IV I II III IV I II III IV I II III IV I II III

2013 2014 2015 2016 2017 2018

Percent

output - US

output - Japan

Percent change from baseline

TMCM

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

III IV I II III IV I II III IV I II III IV I II III IV I II III

2013 2014 2015 2016 2017 2018

price level - US

price level - Japan

percentPercent change from baseline

-.01

.00

.01

.02

.03

.04

.05

.06

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

US

Japan

Percent deviationfrom baseline

GPM6 - IMF

-.016

-.012

-.008

-.004

.000

.004

.008

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Emerging AsiaLatin America

Output

Percentage deviationfrom baseline

The Breakdown of the NICE System…

A

B A B

σy

σp σp

σy

Country 1 Country 2

A

B A B

σy

σp σp

σy

Country 1 Country 2

C

A

B A B

σy

σp σp

σy

Country 1 Country 2

C C

A

B A B

σy

σp σp

σy

Country 1 Country 2

C

A

B A B

σy

σp σp

σy

Country 1 Country 2

C D

i

if

2nd central bank

Initial cut is 1% Δi = -2

Δif = -2

1st central bank

Source: Mervyn King’s Stamp Lecture (2012)

Alternative View: The Tradeoff Curve Shifted

Key Points Behind Alternative View

• Rules-based policy is good in normal times, – But “times are by no means normal” – So we have to deviate

• Global deviation is good (at least for G7) • “these policies are not ‘beggar-thy-neighbor’

but rather are positive-sum, ‘enrich-thy-neighbor’ actions”

Going forward

• Goal should be an expanded rules-based system similar to the 1980s, 1990s and until recently which would operate near an international cooperative equilibrium.

• International monetary policy coordination—at least formal discussions of rules-based policies and the issues reviewed here—would help the world get to this desirable situation