Open economies review 6:5-28 (1995) © 1995 Kluwer Academic Publishers. Printed in The Netherlands. Commitment and Coordination in a Dynamic Game Model of International Economic Policy-Making REINHARD NECK Department of Economics, University of Bielefeld, Bielefeld, Germany ENGELBERT J. DOCKNER Department of Business Administration, University of Vienna, Vienna, Austria Key words: policy coordination, international macroeconomics, stabilization policies, dynamic game Abstract in this paper, we consider a dynamic game model of two identical countries. Policy-makers of both countries have quadratic intertemporal objective functions and want to stabilize domestic output, domestic inflation, and the real rate of exchange. We present different analytical and numerical solutions for this policy game. Noncooperative open-loop equilibria are interpreted as requiring unilateral commit- ment and policy-makers' credibility. Potential gains from cooperation are present, as the noncooperative equilibrium solutions are not Pareto-optimal. Under an information pattern that admits memory strategies, the possibility of obtaining "cooperative" results without coordination and commitment arises. During recent years, many insights into the design of stabilization policies in an international framework have been obtained from the analysis of dynamic models of open, interdependent economies (cf., Buiter and Marston 1985). In particular, two problems have received great attention among economists, namely the possi- ble advantages to be obtained from international policy coordination and the formu- lation of policies that are time-consistent. However, it seems that the close con- nections between these two issues have not yet been sufficiently recognized. In our view, dynamic game theory provides the appropriate methodological approach to analyze both problems and to display the common theoretical background behind them. To show this, in the present paper we apply differential game theory to char- acterize and compare, analytically and numerically, results of policies from several equilibrium solution concepts for a simple dynamic model of international stabiliza- tion policies. We stress the importance of the assumed information pattern for the design and the properties of "optimal" policies in the presence of strategic inter- dependence and for the possibilities and advantages of unilateral and bilateral com- mitment in international economic policy-making. The plan of the paper is as follows: In section 1, we describe the model to be used. We consider a dynamic model of two identical countries with strategically acting policy-makers, who aim at stabilizing domestic output and inflation and the rate of exchange. Then we derive noncooperative equilibrium solutions for the