Abstract :
We study the interaction of multiple large economies in dynamic stochastic general
equilibrium. Each economy has a monetary policymaker that attempts to control the
economy through the use of a linear nominal interest rate feedback rule. The main
results show how the determinacy of worldwide equilibrium depends on the joint
behavior of policymakers worldwide. The results also show how indeterminacy exposes
all economies to endogenous volatility, even ones where monetary policy may be judged
appropriate from a closed economy perspective. Two quantitative cases are discussed. In
the 1970s, worldwide equilibrium was characterized by a two-dimensional indeterminacy,
despite US adherence to a version of the Taylor principle. In the last 15 years,
worldwide equilibrium was still characterized by a one-dimensional indeterminacy,
leaving all economies exposed to endogenous volatility. This analysis provides a
rationale for a type of international policy coordination, and the gains to coordination in
the sense of avoiding indeterminacy may be large.
