William C Dudley: What does interconnectedness imply for macroeconomic and financial cooperation? Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Swiss National Bank-International Monetary Fund Conference, Zurich, 8 May 2012. *  *  *  It is a pleasure to have the opportunity to speak here today. As I see it, the complex interconnections that exist between the real and financial sectors of the economy, both within and between countries, have important implications for both macroeconomic and regulatory policy. In particular, cross-border coordination in both realms is warranted. Often, macroeconomic and regulatory policies are too narrow in their focus. At times, policies are designed with the goal of being “best” at the national level. Yet the resulting mix of national policies is distinctly inferior to what a well-coordinated global regime could have produced. Today I will discuss two important challenges that go along with living in an interconnected world. The first is how to define what aspects of macroeconomic policy or regulation require greater international coordination and harmonization. Some issues can be handled effectively at a national level, but the crisis has demonstrated clearly that many can not. The second challenge is how to make international coordination workable so that progress can be made in a timely manner while still preserving sufficient autonomy for countries to fashion policies to suit their particular idiosyncratic structures.
In order for the U.S. to reduce its dependence on consumption and to increase its exports, there need to be offsetting adjustments in other countries, such as China. Thus, the key issue to consider in crafting internationally coordinated macroeconomic policy is not whether these adjustments will ultimately take place. They will take place because they have to take place. Instead, the issue for policymakers is whether the policies we put in place will allow adjustments to occur in a way that is consistent with a stable global economy, high levels of employment, and low inflation. At times, the situation is akin to the Prisoner’s Dilemma – a non-cooperative approach will lead to inferior results for both players compared to a cooperative approach in which each side foregoes the chance for highest potential payoff in exchange for the payoff that maximizes returns jointly. But effective cooperation that leads to higher joint returns is difficult in this game because of the complexity of the inter-linkages and the political and institutional constraints that constrain the scope for action at the national level. In macroeconomic terms, the prospects for achieving a more cooperative solution can be enhanced by policy transparency so that the policy goals and reaction function of each authority can be well understood by others. This again applies both within and across countries. For example, the Federal Reserve is making efforts to provide greater clarity about its inflation objective in the context of the dual mandate.