Recent developments in the international economy have raised new questions and possibilities about international macroeconomic policy. Many of these questions have to do with changing or reforming the institutions of policymaking. From an economic perspective, analysis of these questions involves specifying alternative rules or systems for the conduct of policy-- say feedback rules for interest rates or exchange rates--and examining how these rules work by stochastically simulating them in a rational expectations econometric model. From a practical or institutional perspective, they involve examining the role and operation of the institutions of macroeconomic policy making and policy analysis--including the international financial institutions. For example, the trend toward regional trading areas has raised questions about coordination of economic policy both across countries and within countries, including macroeconomic policy, labor market policy, environmental policy, and trade policy. Questions about the need for increased monetary integration, cooperation in financial market regulation, exchange rate stabilization, common currency, or the coordination of fiscal policy have been raised. This research focuses on developing an analytical approach to these types of policy issues. The approach builds on the principal investigator's earlier research on international economic models. The proposal is divided into four parts. The first part investigates the use of rational expectations econometric models for forecasting. The second part uses full information maximum likelihood techniques to estimate a multi-country econometric model which would be updated and modified as part of this estimation. The third part examines the practical significance of the Lucas critique by using stochastic simulations of a rational expectations econometric model. The fourth part focuses on policy design and implementation issues using the framework developed in the first three parts. A key element in the proposed research is the examination of alternative ways to improve the implementation of policy rules or systems that result from policy design research.
