Why (Do) We Want Macroeconomic Policy Coordination?

Since the 1973 collapse of the fixed exchange rate regime established under the Bretton Woods agreement, the world's largest economies have been searching for solutions to the problems of unstable currency values and persistent payments imbalances across countries. This paper reviews the literature on short term exchange rate volatility and longer term exchange rate misalignments, and examines seven different proposals to eliminate them or minimize their economic costs. Most of the proposals would require some form of international macroeconomic policy coordination. The proposals are: adoption of a single world currency, return to a fixed rate system, adoption of a target zone system based on the concept of fundamental equilibrium exchange rates, establishment of a world exchange stabilization fund, macroeconomic policy coordination based on multiple indicators, and imposition of new barriers to international capital flows. The paper concludes with a brief summary of the estimated costs and benefits of coordination, and the prospects for coordination under the G-7 consultative process.