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.
Frankel and Rockett (1988) joined the debate and underscored the problems that might arise if policy-makers decided to coordinate using the wrong macro model of the economy.4 The authors conducted a “horse race” with 11 of the most popular models of the time, and found dramatically different results depending on which model was chosen.