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. Financial markets, by nature, are inherently prone to instability, owing to the fractional reserve system on which they are based. With integrated markets, financial instability is unlikely to remain contained within national borders. All financial disruptions are likely to have an international dimension because the three pillars of a domestic financial system, financial institutions, financial markets and payment and settlement systems, are increasingly international. The fact that financial transactions can be made, as well as market information disseminated, instantaneously and at almost no cost around the globe increases the probability that shocks in individual countries will be propagated elsewhere, even when such contagion might not be warranted by underlying economic fundamentals.