This paper presents a simple counterexample to the belief that policy cooperation among benevolent governments is desirable. It also explains circumstances under which such counter-examples are possible and relates them to the literature on time inconsistency. Since the work of Hamada (1976), investigating the effects of increasing policy cooperation among countries has been a major topic in international economics. A standard conclusion of this work is that increasing policy cooperation among countries is desirable. In a seminal paper, Rogoff (1985) has challenged this view. Using a simple monetary model, Rogoff shows that cooperation among policy makers can lead to a lower level of welfare than noncooperation does. Rogoff's result has caused much consternation among those who advocate policy cooperation, and his work has been criticized along several dimensions. For example, some authors, including Canzoneri and Henderson (1988), have noted that a key assump-tion in Rogoff's model is that the objective function of each country's policy maker does not coincide with the objective function of its residents. Indeed, if in his model policy makers maximize the welfare of their country's residents, the counterexample is overturned

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We contrast properties of real quantities with those of price levels and stocks of money for ten countries over the last century. Although the magnitude of output fluctuations has varied across countries and periods, relations among real quantities have been remarkably uniform. Properties of price levels, however, exhibit striking differences between periods. Inflation rates are more persistent after World War II than before, and price-level fluctuations are typically procyclical before World War II and countercyclical afterward. Fluctuations in money are less highly correlated with output in the postwar period but are no more persistent than in earlier periods.

We examine the limiting behavior of cooperative and noncooperative fiscal policies as countries' market power goes to zero. We show that these policies converge if countries raise revenues through lump-sum taxation. However, if there are unremovable domestic distortions, such as distorting taxes, there can be gains to coordination even when a single country's policy cannot affect world prices. These results differ from the received wisdom in the optimal tariff literature. The key distinction is that, contrary to the tariff literature, the spending decisions of governments are explicitly modeled.

We propose a definition of time-consistent policy for infinite-horizon economies with competitive private agents. Allocations and policies are defined as functions of the history of past policies. A sustainable equilibrium is a sequence of history-contingent policies and allocations that satisfy certain sequential optimality conditions for the government and for private agents. We provide a complete characterization of the sustainable equilibrium outcomes for a variant of Fischer's model of capital taxation. We also relate our work to recent developments in the theory of repeated games.

Backus, Kehoe, and Kydland (1992), Baxter and Crucini (1995), and Stockman and Tesar (1995) find two major discrepancies between standard international business cycle models with complete markets and the data: In the models, cross-country correlations are much higher for consumption than for output, while in the data the opposite is true; and cross-country correlations of employment and investment are negative, while in the data they are positive. This paper introduces a friction into a standard model that helps resolve these anomalies. The friction is that international loans are imperfectly enforceable; any country can renege on its debts and suffer the consequences for future borrowing. To solve for equilibrium in this economy with endogenous incomplete markets, the methods of Marcet and Marimon (1999) are extended. Incorporating the friction helps resolve the anomalies more than does exogenously restricting the assets that can be traded.

Many view the period after the Second Industrial Revolution as a paradigm of a transition to a new economy following a technological revolution, including the Information Technology Revolution. We build a quantitative model of diffusion and growth during transitions to evaluate that view. With a learning process quantified by data on the life cycle of US manufacturing plants, the model accounts for the key features of the transition after the Second Industrial Revolution. But we find that features like those will occur in other transitions only if a large amount of knowledge about old technologies exists before the transition begins.

Are deflation and depression empirically linked? No, concludes a broad historical study of inflation and real output growth rates. Deflation and depression do seem to have been linked during the 1930s. But in the rest of the data for 17 countries and more than 100 years, there is virtually no evidence of such a link.

In this paper, we build a version of the putty-clay model in which there is a large variety of types of capital goods which are combined with energy in different fixed proportions. Our principal contribution is to establish easily checked conditions under which the problem of solving for the equilibrium of the model economy reduces to a dynamic programming problem with only two endogenous state variables, regardless of the number of different types of capital goods that are allowed. In appropriate applications, this result allows us to avoid the 'curse of dimensionality' that typically plagues attempts to analyze the dynamics of economies with a wide variety of capital goods and binding non-negativity constraints on investment. We apply these results to study the equilibrium dynamics of value-added, investment, wages, and energy use in a simple model of energy use with putty-clay capital.

We provide a theoretical interpretation of two features of international data: the countercyclical movements in net exports and the tendency for the trade balance to be negatively correlated with current and future movements in the terms of trade, but positively correlated with past movements. We document the same properties in a two-country stochastic growth model in which trade fluctuations reflect, in large part, the dynamics of capital formation. We find that our general-equilibrium perspective is essential: the relation between the trade balance and the terms of trade depends critically on the source of fluctuations.