Public goods may be supplied by a government agency at the domestic level, such as a central bank that oversees the financial and economic stability of a country, but there is no comparable institution at the international level. The public good of stability may thus be undersupplied. International cooperation aims to instil in countries an understanding of their responsibilities in contributing to a stable economic and financial environment in the world. In addition, it would be impossible for the national institutions of a single or a small number of countries, however important, to ensure the stability of the global trading and financial system. While there exist various reasons to promote the positive externalities, very often the avoidance of negative externalities provides the most compelling motivation for cooperation.
Cooperation can help minimize the prospect of competitive devaluations.
Another important dimension to negative spillovers occurs when the policy mix pursued by a country is unsustainable and, in all likelihood, will be reversed in the near future. Sharp policy reversals have implications for the domestic allocation of resources and therefore carry domestic costs. Moreover, this introduces instability, imposes reallocation on the rest of the world, especially on trading partners, and generates negative international spillover effects. Cooperation can help avoid both the initial disturbance and the policy reversal. Today an additional reason for international cooperation arises from the growth of open capital accounts and highly integrated capital markets of various sorts.