6 - The tastes of European central bankers

Summary

Introduction

In most theoretical analyses of alternative monetary regimes, it is not possible to derive clear-cut conclusions on the decision-makers' welfare under different institutional setting and ‘rules of the game’, without assuming knowledge of their objective functions. For example, international cooperation between two countries can be counterproductive, if some other countries do not join the cooperative agreement; a precise evaluation of the profitability of international cooperation can thus be provided only if policy makers' preferences and the structure of the economic system can accurately be estimated. Moreover, in the absence of binding agreements, international cooperation can only be sustained by the other policymakers' threat to revert to non-cooperation, if one policymaker deviates from the cooperative strategy at a given stage of the policy game. The sustainability of cooperation thus depends on the players' discount rates, on their policy targets and their preferences over these targets.

It is often argued, for example, that gains from cooperation are larger if the policymakers in the two countries have very different targets. Very different targets, however, imply a greater incentive to deviate from the cooperative strategy. A final evaluation of the sustainability of cooperation can thus be provided only after having determined the parameters of the policymakers' objective functions.

It is therefore crucial to estimate these parameters in order to understand whether international cooperation is productive and, if so, whether it can be a stable regime.