Countries gained nothing from coordinating monetary policy when governments committed before financial markets traded in a theoretical model, according to research published by the National Bureau of Economic Research in October 2026.
Louphou Coulibaly and Charles Engel found that independently chosen policies followed the same targeting rule as coordinated policies under that commitment arrangement. Their working paper, “Strategic Monetary Policy in Open Economies,” gives no specific publication day.
The authors examined how two countries should set monetary policy when each government pursues its own country's interests. Their analysis used a theoretical framework rather than observations collected over a historical period.
The model allows sellers to set different prices for different markets and assumes complete financial markets, where claims cover every possible future outcome. The authors found that financial markets were central to the results.
Under what the authors call full commitment, governments commit to policy before asset markets trade. The authors found that the best policy then accounts for how its decisions affect asset values and the distribution of wealth between countries.
That timing changes the incentives facing a government acting in its own interest, the paper said. Changes in prices of financial claims offset the wealth it might otherwise seek through manipulation of relative trade prices.
The authors consequently found no gains from cooperation in that setting. Their result applies to the model's full-commitment arrangement, rather than every way governments might make monetary policy.
The targeting rule was the same whether governments cooperated or acted independently, the authors found. Each government's pursuit of its own interests therefore produced the cooperative rule under the model's assumptions.
The outcome differed when governments waited until asset markets had finished trading before committing to monetary policy, the paper said. The authors describe that alternative timing as partial commitment.
A policy selected with partial commitment may look desirable from an individual country's perspective, the authors said. But the resulting equilibrium, in which each country chooses its policy given the other's choice, produces lower welfare.
Currency misalignments also mattered to governments pursuing domestic interests, the authors found. That differed from a setting where the same goods sell at a common price across countries after exchange-rate conversion.
The paper's conclusions thus depend on both financial arrangements and the timing of policy commitments, the authors said. Their comparison distinguishes the incentives of an individual country from the outcome when both countries act strategically.
The authors said their views do not necessarily represent those of NBER, the Federal Reserve Bank of New York or the Federal Reserve System.
