Senior Research Fellow, International Economics
Tamim Bayoumi

Institutional arrangements for cooperation are important in determining its effectiveness. This paper finds that the processes set up by the G20 can be important in delivering political support for international policy cooperation, but need to be refined and strengthened.

Mark Carney, governor of the Bank of England, talks to Mario Draghi, president of the European Central Bank, after a G20 finance ministers and central bank governors ministerial meeting in Washington DC, US, on 11 April 2014. Photo: Getty Images.Mark Carney, governor of the Bank of England, talks to Mario Draghi, president of the European Central Bank, after a G20 finance ministers and central bank governors ministerial meeting in Washington DC, US, on 11 April 2014. Photo: Getty Images.
  • The 2008 economic crisis gave a huge boost to international economic cooperation, as the world’s largest countries sought to avoid a global depression.
     
  • The G20 initially responded to the crisis by agreeing to cooperate on liquidity support, fiscal stimulus, financial reform and trade. But some of these efforts tailed off quickly as the crisis abated.
     
  • This experience shows that the costs of not cooperating can be very substantial if trust is lost across governments. This is a more important driver of cooperation than seeking small gains from more optimal policies.
     
  • Modelling also shows that when economies face extreme circumstances – for example, when interest rates are close to zero or bank lending is constrained by insufficient capital – potential spillovers to other countries are amplified and the gains from international cooperation are substantial.
     
  • A significant barrier to cooperation is when countries fail to agree on the size (or even the direction) of policy spillovers, for example on the effects of unconventional monetary policies. More work is needed to build a common understanding of these spillover effects.
     
  • The experience of the last five years also shows that the institutional arrangements for cooperation are important in determining its effectiveness. The processes set up by the G20 can be important in delivering political support for international policy cooperation, but need to be refined and strengthened.