The Brookings Institution

It has been a decade since Oudiz and Sachs (1984) first applied game theory techniques to empirical models in an attempt to quantify the gains to coordinating the macroeconomic policies of major industrialized economies. A large literature has subsequently emerged, following and extending this research strategy. This paper surveys the empirical evidence from this and the related literature on regime choice. It focusses on the evidence from studies based on small theoretical simulation models, large scale multi-country models and reduced form econometric evidence. There is a widely held view that the empirical evidence shows negligible gains to coordinating macroeconomic policies. This belief is largely based on results from studies that compare optimal cooperative and non-cooperative policy responses to various shocks. Although described as small by most authors, the size of these gains ar similar to the original results of Oudiz and Sachs. These gains are estimated to be between 0.5 to 1 percent of GDP, or about the size of gains estimated to result from the recent Uruguay Round of trade liberalization. Other studies surveyed in this paper that explicitly deal with uncertainty in the optimizing framework and studies that focus on the performance of alternative policy regimes suggest that the gains to coordinating policies are potentially larger