International capital flows were still severely restricted in Europe and Japan, and financial linkages were still at a relatively vestigial stage – the Herstatt Bank incident notwithstanding.2 Persuasive theoretical and empirical arguments against coordination were also brought to bear during this period.
Rogoff (1985) wrote an influential paper showing how greater co-operation among monetary authorities might lead to an undesirable equilibrium, characterized by increased instability and higher global inflation.3 He argued that without the discipline provided by individual decision-making in a competitive setting and the risk of a sharply depreciating exchange rate in response to any suspected policy misbehaviour, authorities would feel free to collectively ease interest rates in the hopes of securing some short-term gain in output and employment.