International Cooperation and Reputation in an Empirical Two-Bloc Model

This paper examines three questions concerning the international coordination of macroeconomic policy. First it examines whether it is advantageous for governments to cooperate in the determination of monetary and fiscal policies. Second it asks whether it is helpful for governments to establish reputations vis-a-vis their private sectors. Finally it examines the sustainability of cooperative and reputational policies. These questions are addressed using Minilink, an empirical two-bloc model derived from the OECD interlink model. The main results of the analysis may be summarised as follows. To realize the gains from international cooperation requires reputation; and to realize the gains from reputation requires cooperation. Moreover, cooperative policies with reputation are found to be sustainable; and the joint gains from cooperation and reputation are found to be considerable.