Rules for International Monetary Stability Past, Present, and Future

Since the end of the Great Recession in 2009 the central banks of the advanced countries have taken unprecedented actions to reflate and stimulate their economies. There have been significant differences in the timing and pace of these actions. These independent monetary policy actions have had significant spillover effects on the economies and monetary policy strategies of other advanced countries. In addition the monetary policy actions and interventions of the advanced countries have had a significant impact on the emerging market economies leading to the charge of ‘currency wars.’ The perceived negative consequences of spillovers from the actions of national central banks has led to calls for international monetary policy coordination. The arguments for coordination based on game theory are the same today as back in the 1980s, which led to accords which required that participant countries follow policies to improve global welfare at the expense of domestic fundamentals. This led to disastrous consequences. An alternative approach to the international spillovers of national monetary policy actions is to view them as deviations from rules based monetary policy.

Michael D. Bordo is a Board of Governors Professor of Economics and director of the Center for Monetary and Financial History at Rutgers University, New Brunswick, New Jersey. He is currently a distinguished visiting fellow at the Hoover Institution, Stanford University. John B. Taylor is the Bowen H. and Janice Arthur McCoy Senior Fellow at the Hoover Institution and the Mary and Robert Raymond Professor of Economics at Stanford University.