journal contributionposted on 01.07.2009, 00:00 by Allan MeltzerAllan Meltzer
The subject of this panel, policy cooperation, has several meanings. When I became chairman of the International Financial Institution Advisory Commission, two people who are well acquainted with the Bank for International Settlements advised me separately that the Bank plays an important role, one that they valued highly, in promoting understanding and, at times, cooperation. Since I respect and admire Hans Tietmeyer and Alan Greenspan, I accepted their view that the regular meetings of central bankers at this Bank promoted understanding of the political constraints under which some central banks operated and encouraged cooperation. This is one, useful, but relatively narrow meaning of central bank policy cooperation. A second, and to me less appealing, meaning, takes the form of exchange rate coordination. Countries agree to adjust their nominal exchange rates by changing domestic policies. Examples include the 1936 Tripartite Agreement between Britain, France, and the United States or the efforts in the 1970s to convince Germany to expand more rapidly to help the United States. Proposals of t his kind often require actions that are opposite to the policy actions countries would choose in the absence of coordination. For example during the late 1970s, the United States wanted Germany to inflate somewhat faster to prevent nominal dollar depreciation. The German response was, in effect, that the same result could be achieved by less inflation in the United States. Coordination of this kind often fails. A third kind of policy coordination is the topic I want to address. I propose coordination by the United States, Asian and European countries to the growing imbalances in the world economy. The proposal I offer asks countries to agree to policies that are in their own long-run interest but also each others. Political concerns in each country keep them from adopting these policies unilaterally. Mutual agreement – coordination – may be a way of breaking the stalemate.