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Explain the term- Sustainability
One of the major problems identified for international policy coordination is whether the agreed outcome is sustainable. As can be seen from the previous Hamada diagrams all points on the contract curve, except at the Bliss points, lie off both country's reaction curves. Indeed any agreement that coordinates monetary policy on a point other than the Nash equilibrium necessarily implies that at least one country has an incentive. Once it is realised that countries have an incentive to renege upon the agreement no country will enter into policy coordination. This problem of sustainability is also relevant to dynamic games. In this context the problem is that of time inconsistency which arises when a government has the short run incentive to deviate from its long run optimal policy.
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