The debate on international monetary policy coordination There are different proposals on how the IMS should change. In particular, there have been several calls to establish a more formal framework of monetary policy coordination, or some kind of revised Bretton Woods system. Overall, I will argue that the forces which are at play today in the IMS, as described above, call for a strengthening of some of its features rather than an overhaul. Theory First, while the literature suggests that international monetary policy coordination may be instrumental in achieving a globally optimal solution, it generally concludes that the gains from coordination are small relative to an environment in which national policy-makers pursue optimal domestic policies.7 Second, it is not clear that the benefits from coordination increase monotonically with economic and financial integration.8 On the one hand, financial integration intensifies the impact of foreign shocks on the domestic economy. On the other hand, it also improves diversification and insurance opportunities, hence mitigating the impact of foreign shocks. It is difficult to know ex ante which of these effects will dominate both in “normal” and “crisis” times. My suggestion would be that while the diversification effect dominates in “normal” times, in “crisis” times the effects from large adverse spillovers prevail. I will come back to this issue later. Practical obstacles There are also several practical challenges that make more explicit and binding forms of monetary policy coordination difficult. The first stems from political economy. Central banks operate under different mandates, time horizons, objectives and accountability arrangements.

It’s the freedom to decide how best to achieve a defined goal, typically price stability or a combination of price stability and sustainable growth. Independence does not mean freedom from accountability, and accountability does not compromise independence. It does not mean full independence from the government or legislature or the freedom to choose its own leaders. It does not mean that the central bank has the freedom to define its own mandate or set the objectives to which it is held accountable. Why is central bank independence desirable or important? The classic rationale is to make a commitment to price stability more credible in the face of the inevitable and perhaps understandable growth bias of governments and their elected officials. Growth bias in turn creates an inflation bias, which is the temptation to use monetary policy to try to achieve higher rates of growth or lower rates of unemployment by maintaining short-term interest rates at levels lower than are consistent with price stability over time. This temptation, and the related pressures produced by unsustainable fiscal positions, have produced a disturbing legacy of financial crises and economic deprivation. These political pressures can’t be wished away, even with the much broader and deeper public appreciation that now exists of the costs of high inflation. A central bank that is subordinate to that temptation, in reality or in perception, will necessarily be less able to deliver price stability, and growth outcomes over time will necessarily be worse.