Implications for the Asia-Pacific region of coordination of macroeconomic policies in the OECD

The empirical evidence on the gains from coordinating macroeconomic policies in the major economies suggests that the gains to these economies of coordination are quite small. In an earlier study, Sachs and McKibbin found that although this was the case in the industrial economies, there were potentially substantial gains to the developing countries from coordinating policies in the Organization for Cooperation and Development in the case of a global disinflation, as was experienced in the early 1980s. The purpose of the current paper is to explore this issue further by focusing on the differential impacts on the dynamic Asian economies (Hong Kong, Korea, Singapore, Taiwan) and a subgroup of ASEAN nations (Indonesia, Malaysia, Philippines, and Thailand) of coordinated versus uncoordinated policy responses in the OECD. We focus on the transmission of a major fiscal adjustment in the United States under alternative policy responses in the OECD: a money rule, nominal income targeting, noncooperative monetary policy, and cooperative monetary policy, the latter two regimes being defined by solving for dynamic game equilibria given welfare functions in the industrial economies. We find that when the industrial economies either noncooperatively or cooperatively adjust monetary policy in the face of a fiscal contraction in the United States, they tend to follow expansionary monetary policy, which results in the export of U.S. unemployment to the two Asian regions under the current policy regimes in those regions.