International Coordination and Precautionary Policies

ABSTRACT

This paper highlights the rare conditions that lead to international cooperation, and the reasons why eliciting this cooperation may be beneficial in preventing adverse tail shocks from spiraling into global depressions. In normal economic times, deeper macro cooperation among countries is associated with welfare gains akin to Harberger’s second-order magnitude triangle, thus making the odds of cooperation low. When bad tail events induce imminent threats of financial collapse, the perceived losses have a first-order magnitude of terminating the total Marshalian surpluses. The apprehension of these losses in perilous times may elicit rare and beneficial macro cooperation. We close the paper by overviewing the obstacles preventing cooperation and the proliferation of precautionary policies of emerging market economies as a second-best outcome of limited cooperation.