What are the key challenges to achieving effective international macroeconomic coordination?

1 Asymmetric shocks

One of the main challenges to IMC is that different countries may experience asymmetric shocks, which are events that affect some countries more than others. For example, a natural disaster, a pandemic, or a political crisis can have a larger impact on one country than on its trading partners. Asymmetric shocks create divergent macroeconomic conditions and policy preferences across countries, making it harder to agree on a common policy stance. Moreover, asymmetric shocks can also trigger beggar-thy-neighbor policies, such as competitive devaluation or trade protectionism, that worsen the global situation and undermine cooperation.

3 Information and communication issues

A third challenge to IMC is that it requires accurate and timely information and communication among the participants. For example, a country may need to share its macroeconomic data, forecasts, and policy plans with other countries to facilitate coordination. However, this information may be incomplete, unreliable, or inconsistent across different sources, making it difficult to assess the global situation and the policy implications. Moreover, communication among policymakers may be hampered by language barriers, political sensitivities, or conflicting narratives, leading to misunderstandings or mistrust.

4 Institutional and political constraints

A fourth challenge to IMC is that it faces institutional and political constraints that limit its scope and flexibility. For example, a country may have legal or constitutional rules that restrict its fiscal or monetary policy options, such as debt ceilings, balanced budget requirements, or central bank independence. Alternatively, a country may face political pressures from domestic interest groups, public opinion, or electoral cycles that influence its policy choices, such as populism, nationalism, or protectionism. These constraints may prevent a country from participating in or complying with IMC, or impose costs on its adjustment.

5 Distributional and ethical concerns

A fifth challenge to IMC is that it raises distributional and ethical concerns that affect its legitimacy and acceptability. For example, IMC may involve trade-offs between different objectives or groups, such as growth versus stability, or creditors versus debtors. These trade-offs may imply winners and losers, both within and across countries, creating conflicts and grievances. Moreover, IMC may also involve moral hazards, free riding, or externalities, such as bailouts, debt relief, or environmental damage. These issues may erode the trust and solidarity among the participants, or generate resistance and backlash from the public.

6 Heterogeneous preferences and models

A sixth challenge to IMC is that it depends on the degree of heterogeneity of preferences and models among the participants. For example, different countries may have different preferences over the relative weights of various objectives, such as inflation versus unemployment, or current versus future consumption. Similarly, different countries may have different models or beliefs about how the economy works, such as the transmission channels, the expectations formation, or the policy effectiveness. These differences may affect the desirability and feasibility of IMC, as well as the coordination process and outcome.