Cooperative policies among the North,the South,and OPEC: An optimal control application

While the benefits of a global policy coordination effort are known in theory, empirical estimates of the gains of such a move are difficult to come by, casting doubts on whether global policy coordination will ever occur. In this paper we assess, empirically, the viability of cooperative policies among the North, the South, and OPEC. To this end we apply stochastic optimal control to a nonlinear stochastic dynamic econometric model of a three region world economy that highlights the channels of international transmission of oil price effects and the feedback effects of policy responses to oil price changes. Even if cooperative policies exist, and are implemented, not all the parties involved will benefit to the same extent. Thus we also examine the sensitivity of the distribution of income gains (or losses) between the North, the South, and OPEC to alternative specifications of the welfare function.