FINANCIAL INTEGRATION WITH AND WITHOUT INTERNATIONAL-POLICY COORDINATION

This paper studies an economy in which financial integration increases world welfare in the presence of international policy coordination bu t decreases world welfare in its absence. This happens because financi al integration enhances the impact of domestic government policies on foreigners, which increases welfare losses from noncooperative policym aking. The policy message is that financial integration can be success ful if and only if governments agree to coordinate their macroeconomic policies.