COORDINATION OF NATIONAL
Three Reasons for Policy Coordination. When discussing international coordination of national stabilization policies, it may be useful to make a distinction between three different, though related, purposes of such coordination: to influence the business cycle, to influence the long-term price trend, and to avoid inconsistencies among national policy targets.
To influence the business cycle. The first purpose of coordination is to influence the pattern of macroeconomic instability--domestically and globally. In a deep, synchronized international recession, such as in 1974-1976, the purpose of coordinated domestic expansionary actions is, of course, to prevent governments in individual countries either from waiting for export-led expansions generated by domestic demand management in other countries or from trying to engineer export-led expansion all by themselves--a beggar-thy-neighbor policy. The argument for coordinated actions is partly symmetrical in the case of synchronized inflationary booms, as in 1972-1973. Since prices of tradable goods are to a large extent formed on international rather than national markets, in particular for European countries, a main purpose of coordinated actions is to prevent governments from trying to take "free rides" on anti-inflationary policies in other countries, in particular on actions taken by the large countries.
Thus in both recessions and booms a main argument for concerted action is that some of the benefits of policy actions tend to wind up in other countries. In recessions, there is the additional argument that all countries may gain by agreeing to abstain from using policy instruments. that shift unemployment to other countries.
In the case of more "normal" business cycle situations, such as during the main part of the period from the early 1950s to the mid- 1960s, the argument for coordination of national stabilization policies is quite different. The purpose would then be to bring about a desynchronization, rather than a synchronization, of macroeconomic