PORTFOLIO PREFERENCE UNCERTAINTY AND GAINS FROM POLICY COORDINATION

International policy coordination is generally considered to be made l ess likely-and less profitable-by uncertainty about how the economy wo rks. This paper offers a counter example, in which investors' increase d uncertainty about portfolio preference makes coordination more benef icial. Without such coordination, monetary authorities may respond to financial market uncertainty by not fully accommodating demands for in creased liquidity, for fear of inducing exchange rate depreciation. Co ordinated monetary expansion would minimize this danger. This result i s formalized in a model incorporating an equity market; then, the stoc k market crash of October 1987 and its implications for monetary polic y coordination are discussed.