The Case for Fed Cooperation in Monetary Policy: The Federal Reserve and the Prisoner’s Dilemma
Keywords:
Federal Reserve, monetary policy, Prisoner’s Dilemma, currency war, Robert NozickAbstract
During the Global Financial Crisis the US Federal Reserve rejected calls from critics in the EME and elsewhere to be more aware of spillovers and externalities and instead to conduct a coordinated and cooperative monetary policy. This article analyses the 2015 Mundell-Fleming lecture in which former Chairman Ben Bernanke defends Fed policies and rejects cooperation as offering better outcomes. I argue that the model and analytical framework Bernanke used in this defense are inadequate – casting doubt on Fed policies – as they do not incorporate the lesson of the Prisoner’s Dilemma that a cooperative choice can often provide the optimal solution. Relying on the work of the late philosopher Robert Nozick I trace this deficiency to a failure to include evidentiary and symbolic expected utilities in the Fed’s decision-making approach.
Metrics
References
Atwell, John. 1969. “What Is the Accordion Effect Thesis?” Philosophical Quarterly 19, no. 77, 337–42.
R. Axelrod. 1981. “The Emergence of Cooperation Among Egoists.” American Political Science Review, 75, no.2, 306-18.
Bernanke, Ben. “Implications of the Financial Crisis for Economics.” Lecture at the conference co-sponsored by the Center for Economic Policy Studies and the Bendheim Center for Finance, Princeton, New Jersey. September 24, 2010. https://www.bis.org/review/r100929a.pdf
_____. “U.S. Monetary Policy and International Implications.” Speech in Tokyo Monetary Conference. October 14, 2012. http://www.federalreserve.gov/newsevents/speech/bernanke20121014a.htm
_____. “Monetary Policy and the Global Economy.” Speech at the London School of Economics. March 25, 2013. http://www.federalreserve.gov/newsevents/speech/bernanke20130325a.htm.
_____. 2015a. “Federal Reserve Policy in an International Context.” Paper presented as the Mundell-Fleming Lecture at the 16th Jacques Polak Annual Research Conference Hosted by the International Monetary Fund. November 5. Transcript. http://www.brookings.edu/~/media/Blogs/Ben-Bernanke/2015/11/04-fed-policy-international-context/110515BROOKINGSBERNANKE.pdf?la=en.
_____. 2015b. “Federal Reserve Policy in an International Context.” Paper presented as the Mundell-Fleming Lecture at the 16th Jacques Polak Annual Research Conference Hosted by the International Monetary Fund. November 5. http://www.imf.org/external/np/res/seminars/2015/arc/pdf/Bernanke.pdf.
Bank for International Settlements. Annual Report 2016. https://www.bis.org/publ/arpdf/ar2016e0.pdf. For specific commentary see: https://www.bis.org/publ/arpdf/ar2016e_tcintro.htm. Also, “BIS report: Emerging Markets exposed to external shocks due to higher debt.” 2016. https://www.foceconsultora.com/en/bis-report-emerging-markets-exposed-to-external-shocks-due-to-higher-debt/
Blackden, Richard, and Harry Wilson. “Fed Chief Ben Bernanke Denies US Policy Behind Record Global Food Prices.” Telegraph, February 3, 2011. http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/8302111/Fed-chief-Ben-Bernanke-denies-US-policy-behind-record-global-food-prices.html.
Blackstone, Brian. “BIS Warns Countries About Risks of Debt” Wall Street Journal online. Updated June 29, 2010 12:01 am ET https://www.wsj.com/articles/SB10001424052748703964104575334361888321290
Bratman, Michael. 2006. “What Is the Accordion Effect?” Journal of Ethics, 10, no. 1⁄2, 5-19.
Caruso-Cabrera, Michelle. 2014. “Banker showdown: Bernanke tells off India’s Rajan.” CNBC News. April 10. http://www.cnbc.com/2014/04/10/banker-showdown-bernanke-tells-off-indias-rajan.html.
ENS Economic Bureau. 2014. “Bernanke, Rajan face-off over U.S. QE spillover: RBI Governor has called for more global coordination in monetary policy and creation of a ‘safety net.’” ENS New Delhi. Updated: April 12, 1:29 AM. http://indianexpress.com/article/business/business-others/bernanke-rajan-face-off-over-us-qe-spillover/.
Eichengreen, Barry, et al. “Rethinking Central Banking.” Committee on International Economic Policy and Reform, Brookings Institution. 2011. http://www.brookings.edu/research/reports/2011/09/ciepr-central-banking.
_____, “Currency War or International Policy Coordination?” Working Paper. 2013. http://eml.berkeley.edu/~eichengr/curr_war_JPM_2013.pdf.
Feldmann, John. “Causation and Consequences in Monetary Policy: Are Federal Reserve Policies Based on an Inadequate Theory of Causal Responsibility.” Soundings: An Interdisciplinary Journal, 99, no. 3, (2016): 321-66.
_____. 2017. “The avoidance of monetary system conflict: A role for recognition theory in reconstituting the global monetary system.” Global Constitutionalism, 6, no.3, 442–476.
_____. 2020. “Fed as a Moral Enterprise; A Framework for Decision Making,” Ethique et Economique. 17, no.1, 30-59.
Fratzscher, Marcel, Marco Lo Duca, and Roland Straub. “On the International Spillovers of US Quantitative Easing.” Working Paper Series 1557, European Central Bank. 2013. https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1557.pdf
Ghosh, A., J. Kim, M. S. Qureshi, and J. Zalduendo. “Surges.” IMF Research Department Working Paper, WP 12/22, 2012. http://www.imf.org/external/pubs/ft/wp/2012/wp1222.pdf.
Gopinath, Gita, Emine Boz, Camila Casas, Federico J. Dıez, Pierre-Olivier Gourinchas & Mikkel Plagborg-Møller. 2020 “Dominant Currency Paradigm.” American Economic Review. 119. no.3, 677-719.
Gourinchas, Pierre-Olivier. “Dollar as Hegemon? Evidence and Implications for Policy Makers.”Prepared for the 6th Asian Monetary Policy Forum held in Singapore on May 31, 2019. https://berkeley.app.box.com/s/oqtzizo8wch5snic1nys7ig01n6f65la.
_____, & Hélène Rey. 2007. “From World Banker to World Venture Capitalist: U.S. External Adjustment and the Exorbitant Privilege.” Current Account Imbalances: Sustainability and Adjustment, edited by Richard H. Clarida, 11–66. Chicago: University of Chicago Press.
_____, Hélène Rey & Nicolas Govillot. NBER Working paper. July, 2017. https://conference.nber.org/confer//2017/SI2017/IAP/Rey_Gourinchas.pdf Harding, Robin, and Alan Rappeport. “Fed Denies Policy Is Causing Food Rises.” Financial Times Online. February 4, 2011.http://www.ft.com/intl/cms/s/0/5c4ae-aea-2fbd-11e0-91f8-00144feabdc0.html#axzz43oyYPS2p.
Hurley, Stanford. 1994. “A New Take from Nozick on Newcomb’s problem and Prisoner’s Dilemma.” Analysis 54, no.2, 65 - 72
Inman, Philip. “U.S. accused of forcing up world food prices.” Guardian Online. November 5. 2010. http://www.theguardian.com/business/2010/nov/05/us-accused-of-worsening-price-rises.
Kennedy, Simon, Joshua Zumbrun, and Jeff Kearns. “Fed Officials Rebuff Coordination Calls as QE Taper Looms.” Bloomberg, Personal Finance, August 26. 2013. https://www.bloomberg.com/news/2013-08-25/fed-officials-rebuff-coordination-callsas-stimulus-taper-looms.html.
Kim, Tae-joon, “Currency war can create prisoner’s dilemma”, November 9, 2010 http://www.koreatimes.co.kr/www/news/biz/2010/11/123_76035.html
Kreps, David, Paul Milgrom, John Roberts & Robert Wilson. 1982. “Rational Cooperation in the Finitely Repeated Prisoners Dilemma”, Journal of Economic Theory 27, 245-52.
Krichene, Noureddine. “Recent Inflationary Trends in World Commodities Markets.” Working Document, International Monetary Fund, WP/08/130. May, 2008. https://www.imf.org/external/pubs/ft/wp/2008/wp08130.pdf.
Mantega, Guido. 2011. International Monetary and Financial Committee, Statement by Guido Mantega, Minister of Finance, Brazil; On behalf of Brazil, Colombia, Dominican Republic, Ecuador, Guyana, Haiti, Panama, Suriname, Trinidad and Tobago. Twenty-Third MeetinG.
_____. 2012. International Monetary and Financial Committee. Statement by Mr. Guido Mantega, Minister of Finance, Brazil; On behalf of Brazil, Colombia, Dominican Republic, Ecuador, Guyana, Haiti, Panama, Suriname, and Trinidad and Tobago. Twenty-Fifth Meeting.
_____. 2013. International Monetary and Financial Committee, Statement by Guido Mantega, Minister of Finance, Brazil; On behalf of Brazil, Cape Verde, Dominican Republic, Ecuador, Guyana, Haiti, Nicaragua, Panama, Suriname, Timor-Leste, Trinidad and Tobago. Twenty- Seventh Meeting.
_____. 2014. International Monetary and Financial Committee, Statement by Guido Mantega, Minister of Finance, Brazil; On behalf of Brazil, Cabo Verde, Dominican Republic, Ecuador, Guyana, Haiti, Nicaragua, Panama, Suriname, Timor-Leste, Trinidad and Tobago. Twenty-Ninth Meeting.
McCauley, Robert N., Patrick McGuire, & Vladyslav Sushko. “Global dollar credit: links to U.S. monetary policy and leverage.” BIS Working Papers No. 483. 2015. http://www.bis.org/publ/work483.pdf.
McKee, Michael. 2015. Commentary on Bloomberg TV. November 4.
McCalla, Alex. “World Food Prices: Causes and Consequences.” Fellows Address before the Canadian Agricultural Economics Society, Quebec City, August 2008. www.kysq.org/docs/McCalla.doc.
Mercopress. “U.S. Printing Press Is Flooding the World with Dollars, Claims Mantega.” 2011. http://en.mercopress.com/2011/05/03/us-printing-press-is-flooding-the-world-with-dollars-claims-mantega.
Miranda-Agrippino, Silvia, & Hélène Rey. 2012. “World Asset Markets and Global Liquidity.” Speech presented at the Frankfurt ECB BIS Conference, London Business School. February.
_____. The Global Financial Cycle.” prepared for the Handbook of International Economics, Volume V, edited by Gita Gopinath, Elhanan Helpman and Kenneth Rogoff. 2021. . http://www.helenerey.eu/AjaxRequestHandler.ashx?Function=GetSecuredDOC&DOCUrl=App_Data/helenerey_eu/Published-Papers_en-GB/_Documents_202122/338569829_67186463733_MirandaAgrippino_Rey_Handbook.pdf
Neely, Christopher J. “The Large-Scale Asset Purchases Had Large International Effects.” Working Paper Series 2010-018C. St. Louis: Federal Reserve Bank of St. Louis. January, 2011. https://research.stlouisfed.org/conferences/qe/Neely_- -_2010-018_1.pdf.
Nozick, Robert. 1993. “Decision Value’. Chapter 2. The Nature of Rationality. Princeton, NJ: Princeton University Press, 41-63.
Ocampo, Jose Antonio. “The Federal Reserve and the Currency Wars.” Project Syndicate. October 2. 2012. http://www.project-syndicate.org/commentary/mantega-fed-ecb-monetary-quantitative-easing-by-jose-antonio-ocampo#2DYmuGGfdB6Cl4fQ.99.
_____. 2017. Resetting the International Monetary (Non)System. A study prepared by the United Nations University World Institute for Development Economics Research (UNU-WIDER). Oxford University Press.
Rajan, Raghuram. “A step in the dark: unconventional monetary policy after the crisis; Andrew Crockett Memorial Lecture.” 23 June, 2013. https://www.bis.org/events/agm2013/sp130623.htm. For commentary see: https://www.moneylife.in/article/what-does-raghuram-rajan-think-of-ben-bernankes-quantitative-easing-programme/34773.html
_____. 2014a. “Competitive Monetary Easing: Is It Yesterday Once More.” Remarks at the Brookings Institution. April 10. http://www.brookings.edu/~/media/events/2014/04/10%20global%20monetary%20policy%20hutchins/rajan_remarks_at_brookings.pdf.
_____. 2014b. Statement by Dr. Raghuram Rajan, Alternate Governor for India (Representing the Constituency consisting of Bangladesh, Bhutan, India, and Sri Lanka) to the International Monetary and Financial Committee, Washington, DC. April. https://www.imf.org/External/spring/2014/imfc/statement/eng/ind.pdf.
_____. 2014c. Statement by Dr. Raghuram Rajan, Alternate Governor for India (Representing the Constituency consisting of Bangladesh, Bhutan, India, and Sri Lanka) to the International Monetary and Financial Committee, Washington, DC. October. https://www.imf.org/External/AM/2014/imfc/statement/eng/ind.pdf.
Rathbone, John, and Jonathan Wheatley. “Brazil’s Finance Chief Attacks U.S. Over QE.” Financial Times Online. September 20, 2012. http://www.ft.com/intl/cms/s/0/69c0b800-032c-11e2-a484-00144feabdc0.html.
Reuters. “Bernanke Says Fed Policy Could Benefit Global Economy.” New York Times. October 14, 2012. http://www.nytimes.com/2012/10/15/business/bernanke-defends-fed-from-claims-it-is-being-selfish.html?r=0.
Rey, Hélène. “Dilemma Not Trilemma: The Global Financial Cycle and Monetary Policy Independence.” Paper presented at the Kansas City Federal Reserve Jackson Hole Conference. August 26, 2013. http://www.kc.frb.org/publicat/sympos/2013/2013Rey.pdf.
_____. “International Channels of Transmission of Monetary Policy and the Mundellian Trilemma.” Paper presented at the 15th Jacques Polak Annual Research Conference Hosted by the International Monetary Fund. Washington, DC. November 13–14, 2014. http://www.imf.org/external/np/res/seminars/2014/arc/pdf/Rey.pdf.
_____. “International Channels of Transmission of Monetary Policy and the Mundellian Trilemma.” December 22, 2015. http://www.helenerey.eu/AjaxRequestHandler.ashx?Function=GetSecuredDOC&DOCUrl=App_Data/helenerey_eu/Published-Papers_enGB/_Documents_2015-16/157224237_67186463733_21decemberMundellFleming.pdf.
Trotman, Andrew. “Federal Reserve rate rise would cause panic and turmoil warns World Bank.” Telegraph. September 9. 2015. http://www.telegraph.co.uk/finance/economics/11852633/Federal-Reserve-rate-rise-would-cause-panic-and-turmoil-warns-World-Bank.html.
Weiner, Antje. “Theory of Contestation: A Concise Summary of its Argument and Concepts.” (2017) 49 Polity 1. https://www.journals.uchicago.edu/doi/full/10.1086/690100
Wheatley, Jonathan, and Philip Graham. “Brazil in Currency War Alert.” Financial Times Online. September 27. 2010. http://www.ft.com/cms/s/0/33ff9624-ca48-11df-a860-00144feab49a.html.
White, William. “Ultra Easy Monetary Policy and the Law of Unintended Consequences.” Federal Reserve Bank of Dallas Globalization and Monetary Policy Institute Working Paper, No. 126. 2012. http://www.dallasfed.org/assets/documents/institute/wpapers/2012/0126.pdf.
Wikipedia. Stackelberg leader defined. 2022. https://en.wikipedia.org/wiki/Stackelberg_competition
Zhang, Moran. “Bernanke Defends Fed from Claims It Is Being Selfish and Hurting Emerging Economies.” IBTimes Online. October 12, 2012. http://www.ibtimes.com/bernanke-defends-fed-claims-it-being-selfish-hurting-emerging-economies-846263.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2023 Ética, economía y bienes comunes
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
CC BY-NC-ND 4.0 Creative Commons Attribution-NonCommercial-NoDerivative 4.0 Internal licenses. This license allows you to share, copy, distribute and transmit the work for non-commercial purposes, providing attribution is made to the authors (but not in a way that suggests that he endorses you or your use of the work). In order to access detailed and updated information on the license, please visit: https://creativecommons.org/licenses/by-nc-sa/4.0/
