Jeremy S Pal
email: jpal@alum.mit.edu

Filippo Giorgi

Xunqiang Bi

Nellie Elguindi

Fabien Solmon

Xuejie Gao

Sara A Rauscher

Raquel Francisco

Ashraf Zakey

Jonathan Winter

Moetasim Ashfaq

Faisal S Syed

Jason L Bell

Noah S Diffenbaugh

Jagadish Karmacharya

Abourahamane Konaré

Daniel Martinez

Rosmeri P Da Rocha

Lisa C Sloan

Allison L Steiner

Regional climate modeling for the developing world: The ICTP RegCM3 and RegCNET

de niveau recherche, publiés ou non, émanant des établissements d'enseignement et de recherche français ou étrangers, des laboratoires publics ou privés.

and the costs of both PCs and data storage devices have correspondingly decreased, thereby allowing EDN scientists to locally run complex climate models. The expertise required to configure and run such models has thus become a greater limitation to their widespread use in EDNs.

The Abdus Salam International Centre for Theoretical Physics (ICTP) was established in the early 1960s with the mission to foster the growth of science in EDNs. Within this mission, the ICTP Earth System Physics (ESP) section has further developed a regional climate model (RCM) specifically designed to suit the needs of scientists working in EDNs. The importance of regional climate modeling for involving EDN scientists in climate research was recently highlighted by [START_REF] Huntingford | Climate equity for all[END_REF]. The latest version of the ICTP RCM, named the ICTP Regional Climate Model version 3 (RegCM3), is the third generation of a modeling framework originally described in [START_REF] Errico | A regional climate model for the western United States[END_REF]; and Dickinson et al. (1989;RegCMl), and later upgraded as described by Giorgi et al. (1993a,b;RegCM2) and Giorgi and Mearns (1999;RegCM2.5).

The ICTP ESP section maintains and distrib utes RegCM3 to a community of users worldwide, and the source code is fr eely available for research purposes. In order to meet the needs of this broad research community, RegCM3 has been designed to be user-friendly and highly portable to a variety of computer platforms. Compared to previous versions of the model, several improvements to the physics packages that enhance model performance in tropi cal and subtropical regions have been implemented.

In addition, the model can be interfaced with a wide range of large-scale boundary driving fields.

This community of RegCM3 users fo rms the basis of the ICTP-maintained Regional Climate Research Network (RegCNET). The overall purpose of RegCNET is to stimulate south-south and north-south scientific interactions on the topic of regional climate and impacts research and modeling, thereby helping to build and empower a community of scientists from EDNs. Here we define south-south as interactions between scien tists in EDNs, and north-south as those between scientists in economically advanced nations (EANs; north) and EDNs (south). The network is built upon common research interests in regional climate vari ability, predictability, and change, and the associated impacts among scientists in both EANs and EDNs. Although RegCNET researchers do employ other models and methods, the use of a common tool, RegCM3, helps to increase and strengthen interac tions within the network.

In the second section we describe the activities of RegCNET and then discuss its potential to build scientific capacity in the area of regional climate and impacts research. RegCM3, the main tool of RegCNET, is presented in the third section. We focus the discussion of RegCM3 on new developments in the model that have led to improved simulations over tropical and subtropical domains, thereby making the model a more useful tool for RegCNET scientists. Some illustrative results from these simulations are presented in the fourth section. Finally, a summary and future perspectives are presented.

DESCRIPTION OF ICTP RegCNET. RegCNET was inaugurated during the First ICTP Workshop on the Theory and Use of Regional Climate Models in June 2003. It has four primary activities to foster south-south and north-south scientific interac tions on the topic of regional climate and impacts research, which are described below. Within the framework of RegCNET, scientists pursue regional climate research on a variety of topics, including regional climate change, prediction, and variability. RegCM3 is the primary tool used for this network; however, other tools are also used and encouraged, such as global models, observational datasets, and output f r om other model simulations. Recently, we broadened these topics to include some of the societal and ecological impacts of regional climate change and variability. The RegCNET Web site is maintained at users.ictp.it/RegCNET/. RegCNET performs the following functions.

Organize and host regular meetings at the ICTP. A main component of RegCNET is the organiza tion and hosting of workshops on regional climate research. These workshops emphasize regional climate modeling and include lectures on the theory and applications of RC Ms, as well as hands on sessions on the use of RegCM3. Expert users, some of which are EDN participants from previous workshops, present and share their research, thereby allowing new participants to benefit from their ex perience. This provides an excellent opportunity for interaction with the greater scientific community. The First ICTP Workshop on the Theory and Use of Regional Climate Models, held June 2003, was attended by more than 70 participants from nearly 30 countries, mostly EDNs. In order to encourage broad participation among scientists from EDNs, ICTP supports travel to and local expenses at the workshops for EDN participants. The ICTP work shops also provide opportunities for the community to discuss the future directions of RegCNET, further developments of RegCM3, and general needs of the EDN participants. At our most recent workshop in June 2006, training was provided in the use of two crop and two hydrological models with RCM data. Information on upcoming ICTP regional climate research workshops may be found at users.ictp. it/ RegCN ET /activities. htm I.

Establish collaborative research projects. One of the main problems faced by E.ON scientists is scientific isolation. To ameliorate this problem, a primary aim of RegCNET is the development of research projects designed and led by EDN scientists and to foster collaborations with experts in other countries. These collaborations typically include both south-south and north-south interactions. It is important to emphasize that the proj ects are designed and led by the EDN scientists, providing a greater sense of ownership and enthusiasm.

To help substantiate these collaborations, ICTP develops, maintains, and supports RegCM3, as well as a number of modeling and observational datasets. Scientific advice and supervision is provided to young scientists. In addition, the ICTP regular meetings provide forums to assess the progress of the projects, obtain fe edback, and plan future activities.

An important measure of success is the publication of scientific results in internationally peer-reviewed journals. Collaborative research projects initiated at the June 2003 meeting resulted in the submission of 21 articles (18 accepted) to a special RegCNET issue of Theoretical and Applied Climatology involving nearly 40 authors from EDNs (Giorgi et al. 2006). Most of the papers were the direct result of collaborations between scientists in EDNs and EANs.

Support joint ICTP workshops in EDNs. The main goals of these workshops are to identify questions and prob lems of specific interest in regional climate research and to design and develop relevant collaborative projects. These workshops are also important for understanding and addressing local infrastructural problems faced by the EDN scientists. Compared with the ICTP-hosted workshops having participa tion from around the world, local experts f r om the region are more involved in the educational aspects of these on-site workshops. For example, Pakistani scientists who attended the inaugural workshop in 2003 provided significant training at a joint Global Change Impact Studies Centre (GCISC)/ICTP work shop on regional climate modeling in Islamabad, Pakistan, in 2004.

The smaller size of these workshops allows for more targeted and individual attention to the participants and to their scientific and technical needs. As a result, these EDN-hosted workshops arouse a greater sense of ownership and enthusiasm in the collaborative effort. To date, such workshops have taken place in Islamabad, Pakistan (February 2004); Prague, Czech Republic (December 2004); Alexandria, Egypt (May 2005); Accra, Ghana (January 2006); and Gaborone, Botswana (February 2007).

Award ICTP-sponsored short-term research visits. These visits allow scientists working in EDNs to stay in residence at ICTP while working on independent and collaborative research projects, generally for a period of three to six months. These scientists have daily interactions with ICTP ESP scientists, as well as access to the ICTP infrastructure. In addition, since many of the EDN members of RegCNET have multiple scientific responsibilities in their home countries (which in some cases include considerable non-climate-related activities), these sponsored visits provide an opportunity to devote undivided thought and effort to regional climate research. Examples of research performed during such visits include the improvement of the representation of convection, aerosols, and dust. Others have researched the impact of land cover changes and increased greenhouse gas concentrations on climate. Most recently researchers have investigated impacts of climate variability and change on water resources and crops. Information on applying for an ICTP-sponsored educational opportunity can be found at www. ictp.it/pages/ education.html.

Maintain the RegCNET e-mail list. Apart from the workshops, the primary forum for RegCNET inter actions is an e-mail list (regcnet@lists.ictp.it). The list currently includes more than 250 members from both EDNs and EANs. Members discuss a variety of topics ranging from research ideas to project details. The interactions stimulated by the e-mail list give the community a greater sense of involvement, as well as encourage the progress of individual and collabora tive research projects.

DESCRIPTION OF RegCM3. ICTP RegCM3 development encompasses efforts from a number of scientists worldwide. Some of the contributions were made by scientists from EDNs as a direct result of the RegCNET activities, such as the inclusion of the Massachusetts Institute ofTechnology (MIT) convec tion scheme and a dust module (see below). In this section, we first present a brief history of the RegCM system and then a description of new developments in RegCM3. The current release ofRegCM3, as well as a beta version with features in testing, may be found at users.ictp.it/ RegCNET/model.html.

RegCM history. Table 1 lists the various dynamical and physical packages of successive versions of the RegCM system. RegCM3 is an integration of the main improvements that have been made to version 2.5 (RegCM2.5) as described in Giorgi and Mearns (1999). These improvements are in the representa tion of precipitation physics, surface physics, atmo spheric chemistry and aerosols, model input fields, and user interface. In addition, the model code has been modified for parallel computing. An impor tant aspect of RegCM3 is that it is user-friendly and operates on a variety of computer platforms. To that end, substantial changes have been made to the preprocessing, running, and postprocessing Grell et al. 1994) . It is a primitive-equation, hydrostatic, compressible, sigma-vertical coordinate model. We refer the reader to the MMS documenta tion (Grell et al. 1994) and articles describing the previous releases of the model (Giorgi and Shields 1999;Giorgi et al. 1993a) for more details.

Model physics. Many of the model physics packages in RegCM3 have been augmented since the release of RegCM2.5. These include the convective and noncon vective precipitation schemes, the land surface and ocean flux schemes, and atmospheric chemistry and aerosol modules. The radiative transfer package and planetary boundary layer scheme are still essentially unmodified, although small adjustments to some model parameters have been implemented.

PRECIPITATION. The fo rmation of precipitation in

RegCM3 is represented in two forms: resolvable (or large scale) and convective (subgrid). The re solvable precipitation is generally associated with large-scale systems that move relatively slowly in the vertical direction, and is most common in the winter hemisphere. Conversely, convective precipita tion typically occurs in the summer hemisphere and tropics at scales finer than 1 km. Because of its fine scale, convective precipitation must be parameterized in most climate models. In RegCM3, the resolvable-scale precipitation is represented using the subgrid explicit moisture (SUBEX) scheme (Pal et al. 2000) . SUBEX accounts for the subgrid-scale variability of clouds and includes formulations for the autoconversion of cloud water into rain water, the accretion of cloud droplets by falling raindrops, and the evaporation of falling rain drops. Cloud fractional cover is computed from the relative humidity, and clouds form when the relative humidity exceeds a certain threshold below grid cell saturation. In addition, the cloud liquid water thresh old for the formation of rainfall is based on empirical in-cloud observations of cloud liquid water amounts. The implementation of this scheme has been shown to substantially improve the simulation of precipitation, temperature, and other cloud-related variables over the continental United States (Pal et al. 2000) .

The parameterization of convective precipitation still remains one of the most important sources of errors in climate models. Three options are available in RegCM3 to represent cumulus convection: 1) the modified Anthes-Kuo scheme [START_REF] Giorgi | Sensitivity of simulated summertime precipitation over the western United States to physics parameterizations[END_REF][START_REF] Anthes | A cumulus parameterization scheme utilizing a one-dimensional cloud model[END_REF]; 2) the Grell scheme [START_REF] Grell | Prognostic evaluation of assumptions used by cumulus parameterizations[END_REF]; and 3) the MIT scheme (Emanuel and Zivkovic Rothman 1999;[START_REF] Emanuel | A scheme for representing cumu lus convection in large-scale models[END_REF]) . The Anthes-Kuo and Grell schemes are well documented in articles describing results f r om the previous releases of the RegCM system (e.g., Giorgi et al. 1993b;[START_REF] Giorgi | Sensitivity of simulated summertime precipitation over the western United States to physics parameterizations[END_REF].

The newest cumulus convection option to RegCM3 is the MIT scheme. Here we present a brief description of the scheme [more detailed descriptions can be found in [START_REF] Emanuel | A scheme for representing cumu lus convection in large-scale models[END_REF] and Emanuel and Zivkovic Rothman (1999)]. The scheme assumes that the mixing in clouds is highly episodic and inhomogeneous (as opposed to a continuous entraining plume) and considers convective fluxes based on an idealized model of sub-cloud-scale updrafts and downdrafts. Convection is triggered when the level of neutral buoyancy is greater than the cloud-base level. Between these two levels, air is lifted and a fraction of the condensed moisture forms precipitation while the remaining fraction forms the cloud. The cloud is assumed to mix with the air from the environment according to a uniform spectrum of mixtures that ascend or descend to their respective levels of neutral buoyancy. The mixing entrainment and detrainment rates are functions of the vertical gradients of buoyancy in clouds. The fraction of the total cloud-base mass flux that mixes with its envi ronment at each level is proportional to the undiluted buoyancy rate of change with altitude. The cloud-base upward mass flux is relaxed toward the sub-cloud layer quasiequilibrium.

In addition to a more physical representation of convection, the MIT scheme offers several advantages compared to the other RegCM3 convection options. For instance, it includes a formulation of the autocon version of cloud water into precipitation inside cumulus clouds, and ice processes are accounted for by allowing the autoconversion threshold water content to be tem perature dependent. Additionally, the precipitation is added to a single, hydrostatic, unsaturated downdraft that transports heat and water. Last, the MIT scheme considers the transport of passive tracers.

BIOSPHERE. Since RegCM2, the surface physics com putations have been performed using Biosphere Atmosphere Transfer Scheme (BATS) version le (Dickinson et al. 1993), which describes the trans fer of energy, mass, and momentum between the atmosphere and biosphere. In RegCM3, additional modifications have been made to BA TS in order to account for the subgrid variability of topography and land cover using a mosaic-type approach (named SUBBATS; Giorgi et al. 2003b). This modification adopts a regular fi nescale surface subgrid for each coarse model grid cell. Meteorological variables are disaggregated from the coarse grid to the fine grid based on the topographic differences between the subgrid and coarse grid. The BATS calculations are then performed separately for each subgrid cell, and surface fluxes are reaggregated onto the coarse grid cell for input to the atmospheric model. This parameterization showed a marked improvement in the representation of the surface hydrological cycle in mountainous regions (Giorgi et al. 2003b).

WATER BODIES. In RegCM3, water bodies can be categorized as open (e.g., oceans) and enclosed (e.g., lakes). The air-sea energy fluxes from open bodies are computed from prescribed sea surface temperatures (SSTs) with no two-way interaction. That is, the ocean affects the atmosphere, but the atmosphere does not affect the ocean. The energy fluxes from enclosed water bodies can be computed using one of two methods: either a column lake model with two-way interaction [START_REF] Hostetler | Simulation of lake evaporation with applicaiton to modeling lake level variations at Harney-Malheur Lake, Oregon[END_REF] or the prescribed SST method used for open bodies.

In RegCM3, there are two parameterization options for computing fluxes from open water bodies: the BATS formulation and the newly implemented Zeng scheme [START_REF] Zeng | Inter comparison of bulk aerodynamic algorithms for the computation of sea surface fluxes using TOGA COARE and TAO data[END_REF] . BATS uses standard Monin-Obukhov similarity relations to compute the fluxes with no special treatment of convective and very stable conditions. In addition, the roughness length is set to a constant; that is, it is not a fu nction of wind and stability. For these reasons, according to [START_REF] Zeng | Inter comparison of bulk aerodynamic algorithms for the computation of sea surface fluxes using TOGA COARE and TAO data[END_REF], the ocean flux computations of BATS tend to overestimate evaporation in both high and low wind conditions. The Zeng scheme describes all stability conditions and includes a gustiness velocity to account for the additional flux induced by boundary layer scale variability. Te sts by [START_REF] Francisco | Regional model simulation of summer rainfall over the Philippines[END_REF] show that RegCM3 coupled with the Zeng scheme better estimates evaporative fluxes over the South Pacific Ocean.

ATMOSPHERIC AEROSOLS AND CHEMISTRY. Atmospheric aerosols are known to have a substantial impact on the climate system, especially at regional scales. An aerosol scheme accounting for sulfate, organic carbon, and black carbon aerosols is incorporated in RegCM3 as described by Qian et al. (2001) and [START_REF] Solmon | Aerosol modeling for regional climate studies: Application to anthropogenic particles and evaluation over a European/African domain[END_REF] . Briefly, the scheme describes advection by atmospheric winds, diffusion by turbulence, vertical transport by deep cumulus convection, dry and wet removal processes, and gas and aqueous phase chemi cal conversion mechanisms. Wet removal both by resolvable-and subgrid-scale precipitation is param eterized as a function of the rate of conversion f r om cloud water to rain water and the hydrophilicity of the different aerosols. Surface dry deposition is calculated according to prescribed deposition velocities over land and water surfaces.

Both direct and indirect aerosol radiative effects are included in RegCM3 (Giorgi et al. 2003a) . Direct radiative effects are accounted for by specifying the aerosol optical properties: extinction coefficient, single-scattering albedo, and an asymmetry parameter. Indirect effects are described by assuming that the effective cloud droplet radius depends on the aerosol mass concentration. This coupled aerosol chemistry model has been applied to the east Asia region (Giorgi et al. 2003a) and the Europe-Af rica region [START_REF] Solmon | Aerosol modeling for regional climate studies: Application to anthropogenic particles and evaluation over a European/African domain[END_REF]).

In addition, the coupling of a desert dust parame terization to the RegCM3 has recently been completed [START_REF] Zakey | Development and testing of a desert dust module in a regional climate model[END_REF]) using a scheme based primarily on the work of [START_REF] Marticorena | Modeling the atmospheric dust cycle: 1. Design of a soil derived dust emission scheme[END_REF] and [START_REF] Alfaro | Modeling mineral aerosol production by wind erosion: Emission inten sities and aerosol size distribution in source areas[END_REF]. The coupled RegCM3-dust model has been tested for dust storm cases as well as long-term simulations over an Africa-Europe domain by [START_REF] Zakey | Development and testing of a desert dust module in a regional climate model[END_REF].

Initial and boundary conditions. RegCM3 requires initial conditions and time-dependent lateral boundary conditions for the wind components, temperature, surface pressure, and water vapor. In addition, SSTs must be specified over oceans. An interface has been developed to easily port various reanalysis and GCM boundary conditions to the RegCM3 framework. Soil moisture is generally initialized according to the vegetation specification (e.g., desert = dry) [START_REF] Errico | A regional climate model for the western United States[END_REF]. However, if desired, soil moisture can be initialized according the Climate Prediction Center (CPC) datasets [START_REF] Huang | Analysis of model-calculated soil mois ture over the U.S. (1931-93) and application in long-range temperature[END_REF][START_REF] Fan | Climate Prediction Center global monthly soil moisture data set at 0.5 resolution from 1948 to present[END_REF]) with a prescribed vertical profile according to [START_REF] Pal | Pathways relating soil moisture conditions to future summer rainfall within a model of the land-atmosphere system[END_REF] or using soil moisture from the driving model. The land cover is specified using the Global Land Cover Characterization (GLCC) version 2 data provided by the U.S. Geological Survey (USGS) Earth Resources Observation System Data Center [START_REF] Loveland | Development of a global land cover characteristics database and IGBP DISCover from 1-km AV HRR data[END_REF]. As with soil moisture, the soil texture class is generally prescribed according to the vegetation characterization (e.g., desert= sand). Alternatively, an interface exists to interpolate the Food and Agricul tural Organization of the United Nations (FAQ) soil texture data [START_REF] Webb | Specifying land surface characteristics in general circulation models soil profile data set and derived water holding capacities[END_REF] to the RegCM3 grid.

Examples of RegCM applications. RegCM3 has been run over various regions at grid spacings ranging from 10 to 100 km and simulation periods from days to decades to study a variety of scientific problems. Some of these applications include future climate change (Diffenbaugh et al. 2005;Gao et al. 2006a;Giorgi et al. 2004b), air quality (F. Meleux, F. Giorgi, and F. Solmon, unpublished manuscript; [START_REF] Solmon | Aerosol modeling for regional climate studies: Application to anthropogenic particles and evaluation over a European/African domain[END_REF], water resources (Pal and Eltahir 2002), extreme events [START_REF] Bi | a: Mean, interannual vari ability and trends in a regional climate experiment over Europe. I: Present day climate[END_REF]), agriculture [START_REF] White | Increased heat stress in the 21st century reduces and shifts premium wine produc tion in the United States[END_REF], land-cover change (Gao et al. 2006b;[START_REF] Abiodun | Simulation of We st African Monsoon using the RegCM3. Part II: Impact of desertification and deforestation[END_REF], and biosphere-atmosphere interactions (Pal and Eltahir 2003). In addition, some preliminary work has been performed using RegCM3 for seasonal prediction applications [START_REF] Rauscher | Regional climate model domain choice in the tropics based on process considerations[END_REF](Rauscher et al. , 2007;;[START_REF] Rauscher | Regional climate model domain choice in the tropics based on process considerations[END_REF] . This diverse range of applications and regions shows the versatility and portability of the RegCM system.

EXAMPLE CASES FROM TROPICAL BENCHMARK SIMULATIONS USING

RegCM3. To test the performance of RegCM3, we carried out a series of benchmark simulations over a range of midlatitude and tropical regions. It is outside the purpose of this paper to provide a detailed validation of these simulations. Rather, we limit the present discussion to a brief illustration of the model performance by presenting results from three of the benchmark experiments over tropical domains: Africa, South America, and South Asia (Fig. 1). More detailed analyses of these simulations, as well as the other benchmark experiments, will be presented in papers currently in preparation. We focus here on tropical domains because of the RegCNET emphasis on EDNs. In addition, the RegCM system has already been shown to perform well over midlatitude regions [e.g., Pal et al. (2000) for North America; Giorgi et al. (2004a) for Europe; [START_REF] Steiner | The coupling of the Com mon Land Model (CLMO) to a regional climate model[END_REF]; and Gao et al. (2006c) for east Asia] . Apart from the domain locations and sizes, the model configuration for each simulation is identical (including the model param eters). Each domain has a horizontal grid spacing of 50 km and 18 levels in the vertical. The vertical levels are spaced such that the highest concentra tion is near the surface. In each simulation, the MIT scheme is used to represent convection and BATS is used to represent the land surface. We stress that us ing alternative physics options or parameters within a physics option can lead to substantially different and perhaps improved results. For example, [START_REF] Rauscher | Regional climate model domain choice in the tropics based on process considerations[END_REF] showed that simulations over South America using the Grell convection scheme displayed a large dry bias in the austral summer (December-February; DJF) over the Amazon region that was absent in analogous simulations with the MIT scheme. In addition, while the effects of aerosols are not included in these simulations, they can significantly affect climate over these regions (e.g., [START_REF] Menon | Climate effects of black carbon aerosols in China and India[END_REF][START_REF] Solmon | Aerosol modeling for regional climate studies: Application to anthropogenic particles and evaluation over a European/African domain[END_REF] .

The simulations are 14 yr in length (October 1986-January 2000) and use boundary conditions from ERA-40. We analyze 14-yr climatological averages (1987)(1988)(1989)(1990)(1991)(1992)(1993)(1994)(1995)(1996)(1997)(1998)(1999)(2000) of precipitation, surface air temperature, and low-level winds for one season in each region: June-August (JJA) for the West African monsoon system, January-March (JFM) for the South American monsoon system, and June-September (JJAS) for the South Asian monsoon system. These periods encompass the warm and wet seasons over the selected regions. The observations used for com parison with the model results are f r om the Climatic Research Unit (CRU) land surface temperature and precipitation 0.5° resolution dataset, from the CPC Merged Analysis of Precipitation (CMAP) 2.5° reso lution dataset for ocean areas, and from the ERA-40 2.5° resolution product for low-level (sigma = 0.91) winds and air temperature over oceans. Generally speaking, the RCM solution should agree with the large-scale driving fields, but complex topography can cause some deviations. Such differences pro vide an example of the added value that is derived f r om the higher resolution of the RCM simulation. Furthermore, RCM precipitation and surface tem perature fields are often expected to deviate from those of the driving fields. F1G. I. Map of topography and land cover for each domain used in this study. The grid spacing in each domain is 50 km, but the number of grid points and therefore the physical domain size varies for each region. Note that the elevation scale differs for each domain.

Direct comparison to other RCM studies over

West Africa is diffi cult, because the domains, years simulated, and seasons presented vary from study to study. Nonetheless, [START_REF] Afiesimama | Simulation of West African Monsoon using the RegCM3. Part I: Model validation and interannual variability[END_REF] fo und that in RegCM3 simulations driven by NNRP version 2 data and using the Grell scheme, the ITD is simulated to the south of its observed location. Similarly, the ITD was located too far south in simulations using a modified version ofMM5 [START_REF] Vizy | Development and applica tion of a mesoscale climate model for the tropics: Influence of sea surface temperature anomalies on the West African monsoon[END_REF]. In a 25-yr RCM experiment performed for West Africa using Max Planck Institute for Meteorology Regional Model (REMO), [START_REF] Paeth | Regional dynamical downscaling over West Africa: Model evaluation and comparison of wet and dry years[END_REF] reproduced the spatial pattern of annual precipitation, but underes timated total precipitation by up to 25% over southern West Africa. In contrast, West African monsoon climatology. During the north ern summer, the West African monsoon provides the region with most of its annual rainfall. A comparison between the simulated and observed precipitation fields shows that RegCM3 performs reasonably well in capturing the general rainfall patterns (Figs. 2a,b). Areas that have little or no precipitation are well located even at some relatively small scales (e.g., Madagascar) with a noticeable exception over the northwestern Sahel region; however, there is a tendency for the model to simulate excessive precipi tation over the wettest areas. In addition, the location of the core of the monsoon rainbelt [or inter-tropical discontinuity (ITD)] is simulated a fe w degrees too far north over West Africa. Preliminary simulations [START_REF] Gallee | A high-resolution simulation of a West African rainy season using a regional climate model[END_REF] found that Modele Atmospherique Regional (MAR) over estimated precipitation in August, and like RegCM3, placed the ITD north of its observed position. In addition, the precipitation maxima along the coast near Guinea/Sierra Leone and Cameroon were not well captured in their simulation.

Analysis of the low-level winds shows consis tency with ERA-40. Over regions where there is no precipitation, the winds are generally similar to the reanalysis in both magnitude and direction. In the high-convergence regions (i.e., West Africa), the winds tend to be too intense. This is particularly true for the monsoon region, where it can be seen that the intensity of the winds that enter the Guinea coast is too high. Although we are unable to demonstrate cause and effect, it appears that the enhancement of the winds and excessive monsoon convection interact with each other. This conclusion is supported by the fact that [START_REF] Vizy | Development and applica tion of a mesoscale climate model for the tropics: Influence of sea surface temperature anomalies on the West African monsoon[END_REF] show the opposite effect; that is, the northward component of the low level flow is weaker than observed and associated with an ITD that is located too far south.

Over the ocean, the sigma 0.91 temperatures correspond well to the ERA-40 product (Figs. 2c,d). Over land regions, the 2-m temperature patterns agree well with the CRU data. In general, where the model overpredicts (underpredicts) precipitation, there is a tendency to underpredict (overpredict) temperature. An example of this fe ature can be seen over the core portion of the monsoon belt where the surface temperatures are underestimated by up to 2°C. Over the Sahara desert areas, the model shows a tendency to overestimate temperature by 1°-2°C. These biases are of a similar magnitude to low level temperature biases observed in other RCM simulations over West Africa (e.g., [START_REF] Gallee | A high-resolution simulation of a West African rainy season using a regional climate model[END_REF]) . Again, RegCM3 simulations including interactive dusts show a reduction in the surface temperatures over the Sahara (F. Solmon 2007, unpublished manuscript). In addition, preliminary RegCM3 coupled with CLM3 simulations show a reduction in temperature bias, as well, precipitation bias (A. Steiner 2007, un published manuscript) .

(c) CRU/ERA Temperature well, with a tendency for this particular configura tion of the model to overpredict the intensity of the monsoon. South American monsoon system climatology. The Amazon Basin receives the majority of its precipitation during the Southern Hemisphere summer. RegCM3 using the Grell convection scheme (RegCM3/Grell) has had some success in simulating the patterns of precipitation over tropical South America, although it underestimated the magnitudes of both precipitation and temperature (e.g., [START_REF] Rauscher | Regional climate model domain choice in the tropics based on process considerations[END_REF][START_REF] Fernandez | Simulation of the summer circulation over South America by two regional climate models. Part I: Mean climatology[END_REF][START_REF] Rauscher | Regional climate model domain choice in the tropics based on process considerations[END_REF]. This problem was also present in RegCM2.5 (e.g., [START_REF] Qian | Reinitialized versus continuous simulations for regional climate downscaling[END_REF][START_REF] Seth | Simulation and sensitiv ity in a nested modeling system for South America. Part I: Reanalyses boundary forcing[END_REF] and in other RCMs (e.g., [START_REF] Nicolini | January and July regional climate simulation over South America[END_REF][START_REF] Vernekar | Low-level jets and their effects on the South Ameri can summer climate as simulated by the NCEP Eta model[END_REF].

A comparison of our simulation to the CMAP/ CRU data demonstrates that RegCM3 using the MIT scheme performs reasonably well in simulating the In summary, RegCM3 performs fairly well in sim ulating the precipitation, low-level/surface tempera ture, and wind patterns over Africa during JJA. The biases seen in the simulations are similar in magnitude to (or in some cases smaller than) those observed in other RCM studies performed over West Africa. In particular, the main fe atures of the We st African monsoon are captured reasonably distribution of precipitation over South America and its surrounding oceans during JFM (Figs. 3a,b). For the entire Amazon basin, the simulated precipita tion is within 10% of observations. In addition, the low-level wind patterns are in good agreement with the ERA-40 data. This corrects a tendency for weak northeasterlies observed in the simulations of [START_REF] Seth | Simulation and sensitiv ity in a nested modeling system for South America. Part I: Reanalyses boundary forcing[END_REF] and [START_REF] Rojas | Simulation and sensitivity in nested model for South America. Part II: GCM boundary forcing[END_REF] using RegCM2.5. The peak in precipitation at the entry region of the monsoon flow (near the mouth of the Amazon River) is accurately captured, as is the peak in the southern Amazon. Furthermore, the relatively dry conditions over northeast Brazil and Colombia are also well simulated.

Over the Andes, RegCM3 reproduces the location of the precipitation peaks, but tends to overpredict precipitation in the steepest topographical slopes. This is a common occurrence in RCM simulations of South America (e.g., [START_REF] Qian | Reinitialized versus continuous simulations for regional climate downscaling[END_REF][START_REF] Fernandez | Simulation of the summer circulation over South America by two regional climate models. Part I: Mean climatology[END_REF][START_REF] Vernekar | Low-level jets and their effects on the South Ameri can summer climate as simulated by the NCEP Eta model[END_REF][START_REF] Misra | Regional simulation of interannual variability over South America[END_REF]Seth and Roj as 2003). Recent tests with RegCM3 indicate that this overprediction occurs when the curvature of the model topography is largest (e.g., transition from the ocean to the Andes) and that light topographical smoothing applied in such regions can alleviate the problem. Over the ocean, the location of the Atlantic ITCZ is well placed, but its primary core is slightly weak. This is likely due to the excessive precipitation simulated at the eastern boundary of the domain over the ITCZ.

Over land, the spatial distribution of surface air temperature is quite accurately reproduced (Figs. 3c,d), in particular the locations of the local minima and maxima. Temperatures in the simulation, however, are underestimated over the Amazon Basin by 1°-2°C and are overestimated in northern Argentina and Paraguay by the same amount. Over ocean, the sigma 0.91 temperatures are generally well represented, with a slight warm bias (about l0C) over the Atlantic portion of the ITCZ where precipitation is underestimated.

Overall, the use of the MIT convection scheme leads to improved simulation precipitation, tempera ture, and low-level wind patterns compared to the RegCM3/Grell configuration of [START_REF] Rauscher | Regional climate model domain choice in the tropics based on process considerations[END_REF] and to previous versions of the RegCM system. Furthermore, RegCM3 appears to perform better than a suite of four RCMs (including RegCM2.5) evaluated in an intercomparison proj ect over South America [START_REF] Roads | The IRI/ARCs Regional Model Intercomparison over South America[END_REF].

South Asia monsoon climatology. Climate models have traditionally had considerable difficulty simulating the characteristics of the South Asia monsoon pre cipitation [START_REF] Webster | Mon soons: Processses, predictability, and the prospects for prediction[END_REF]. This is likely due in part to the region's complex topography and coastlines, which are typically not well resolved in GCMs. RCMs, however, improve upon the representation of these characteristics (Giorgi et al. 2001). As with the other simulations, the general observed precipitation pat terns are fairly well simulat ed over both land and ocean (Figs. 4a,b ). The locations of high precipitation areas over the western Ghats, Nepali upslopes, and Indo-China Peninsula coastal areas are accurately placed. Of par ticular note, the RegCM3 simulates the peak in cen tral eastern India, though a few degrees to the south. This peak is not captured F1G. 3. Same as Fig. 2, but for JFM (1987)(1988)(1989)(1990)(1991)(1992)(1993)(1994)(1995)(1996)(1997)(1998)(1999)(2000) over South America. Because of the complex nature of the monsoon pro cesses over South Asia, there is little intermodel consistency in the represen tation of precipitation (e.g., [START_REF] Ramel | On the northward shift of the West African monsoon[END_REF][START_REF] Park | The role of surface bound ary forcing over South Asia in the Indian summer monsoon circulation: A regional climate model sensitivity study[END_REF][START_REF] Hassell | Simulating climatic change of the southern Asian monsoon using a nested regional climate model (HadRM2)[END_REF][START_REF] Rao | A numeri cal simulation study of the Indian summer monsoon of 1994 using NCAR MM5[END_REF].

F1G. 4. Same as Fig. 2, but for JJAS (1987)(1988)(1989)(1990)(1991)(1992)(1993)(1994)(1995)(1996)(1997)(1998)(1999)(2000) over south Asia.

The overall qualitative performance of RegCM3 is similar to that of these studies; in some regions, the RegCM3 simulation compares more favorably with observations (e.g., Himalayan upslopes), while in other regions less favorably (e.g., rain shadow over southern India).

The temperature patterns and magnitudes are well simulated, with biases predominantly less than 2°C (Figs. 4c,d). In areas where precipitation is overesti mated, temperatures are overestimated (e.g., western Ghats). As in the Africa simulation, higher-than observed temperatures are simulated in semi-desert and desert regions, particularly over eastern Pakistan. The overall bias is again in line with previous RCM studies over South Asia that include comparisons to surface temperature observations (e.g., [START_REF] Hassell | Simulating climatic change of the southern Asian monsoon using a nested regional climate model (HadRM2)[END_REF][START_REF] Rao | A numeri cal simulation study of the Indian summer monsoon of 1994 using NCAR MM5[END_REF]) .

SUMMARY AND FUTURE PLANS. In this paper, we present the recently inaugurated ICTP Regional Climate Network, or RegCNET, and the newly released ICTP RegCM3. RegCNET is a net work aimed at fostering climate research in EDNs by creating south-south and north-south scientific interactions on the topics of regional climate and impacts research and modeling. The success of RegCNET is demonstrated by a rapid growth in interest and participation since its establishment in June 2003. In particular, an especially noteworthy product of RegCNET is a special issue of Theoretical and Applied Climatology (Giorgi et al. 2006), which include 18 papers led mostly by EDN scientists.

The future activities of RegCNET will continue to address the wide variety of locally specific problems faced by EDN scientists, which often require specifi cally designed solutions. Therefore, a primary aim of future RegCNET activities will be to hold more on-site workshops in EDNs in addition to the regular RegCNET workshop series at ICTP. For example, a workshop of this type was held in Botswana in 2006, and another workshop will be conducted in Turkey in 2007.

Another goal is to expand RegCNET research activities, in particular toward the application of climate model output to impact studies of particular interest to EDNs. In this regard, increased focus will be on climate impacts on hydrology and water resources, agriculture and food production, and air quality. The primary focus of the 2006 biannual RegCNET workshop was to provide training in the use of RCM and GCM output to drive two hydrological and two crop models.

Funding is crucial to the success of RegCNET, which has already started to generate some signifi cant resources for scientists in EDNs. For example, an Asia-Pacific Network for Global Change (APN) project involving institutes in Bangladesh, India, Nepal, and Pakistan was recently awarded for RegCNET-related work. In addition, two Global Change SysTem for Analysis, Research and Training (START) fe llowships were awarded to scientists in Ivory Coast, Niger, and Nigeria. At a larger scale, the European Union project Central and Eastern Europe Climate Change Impact and Vulnerability Assessment (CECILIA), which investigates regional climate and impacts over Central and Eastern Europe, originated from RegCNET.

Thus far, funding for RegCNET activities has relied on the interest and commitment of the participants. It is, however, critical to the growth of RegCNET to pursue fu nding sources directly for RegCNET. In this regard, there are a number of organizations and programs that aim at promoting climate research in EDNs, such as START, APN, and Assessments of Impacts and Adaptations to Climate Change (AIACC). It is important that RegCNET develops some synergistic interactions with these programs in order to enhance its effectiveness and impact.

Along these lines, we plan to formally establish collaborations between EDN institutes and the ICTP. These institutes would act as hubs for the coordina tion of RegCNET activities in their regions. This could include the pursuit of fu nding for collaborative research projects and the provision of infrastruc ture for high-computation facilities. We are in the initial stages of developing such partnerships with the Global Change Impact Studies Centre (GCISC) in Islamabad, Pakistan, and the Kofi Annan Centre of Excellence in Information and Communication Technology (ICT) (KACE) in Accra, Ghana.

Concerning the RegCM system, we describe a number of important developments and improve ments relative to previous versions. In particular, a pointed effort was made to improve the model applicability over tropical regions. The illustrative examples shown here indicate a generally good level of performance within this context. More detailed analyses of these benchmark simulations, along with simulations of climate in additional regions will be presented in future publications.

At present, RegCM3 is a flexible, portable, and user-friendly system that can be applied to a wide range of scientific problems, f r om process studies to seasonal prediction and climate change applications. Future developments envisioned for the RegCM system include a gradual increase in horizontal reso lution afforded by ever-increasing computing power and a move to a nonhydrostatic dynamical core. Higher resolution will also require improvements in the cloud microphysics representation. Consis tent with the general trend in climate modeling, we are also working toward a fully coupled regional climate system model fr amework. In this regard, efforts are underway to couple RegCM3 with the MIT ocean model. In addition, two dynamic land surface schemes [CLM3 and Integrated Biosphere Simulator (IBIS)] will be available upon completion of testing. Within the next few years, RegCM will evolve into a fully coupled nonhydrostatic regional climate modeling system.

It is important to reemphasize that many of the model developments and improvements described in this paper have resulted from interactions and fe ed back within the ReCNET community. Substantial contributions to model development from the RegCNET community include the implementation, testing, and refinement of the MIT convection scheme, the dust and carbon aerosol modules, and the Zeng ocean flux scheme. These significant ad vances of RegCM3 provide strong evidence of the mutually advantageous partnerships catalyzed by RegCNET.

The RegCNET Web site is located at users.ictp. it/RegCNET and the RegCNET forum on regional climate, impacts, and associated issues is accessible by e-mail (regcnet@lists.ictp.it). RegCM3 is available online and free of charge for community use at users. i ctp.it/RegCNET/model.html.

AC KNOWLEDGMENTS. This paper is dedicated to those that have contributed to the growth of the RegCM system over the past 15+ years, the members (250+) of RegCNET and ICTP.

  :l!l:r.-:1 l:::.l:!::l � ehort �•t• including the interactions of Saharan dusts show a tendency to reduce this bias by shifting the monsoon belt south and reducing the intensity of the precipita tion (F. Solmon 2007, un published manuscript).

  (b) RegCM3 Precipitation & Winds (d) RegCM3 Temperature,---, -,.---,, -,'"7" e-F -----,--. ,

F1G. 2 .

 2 Maps of sigma 0.91 winds (m s-1), precipitation (mm day-1), and surface temperature (°C ) for JJA 1987-2000 over Africa. (a) Validation precipitation and wind. (b) RegCMJ precipitation and wind. (c) Validation temperature. (d) RegCMJ temperature. The validation precipitation data are CRU over land and CMAP over ocean. The validation wind data are ERA40. The validation temperature data are CRU over land and ERA40 over ocean.

  (a) CRU/CMAP Precipitation & ERMO Winds (b) RegCMJ Precipitation & Winds

TABLE I . Description of the progression of the versions of the RegCM system.

 I RegCM3 has options to interface with a variety of reanalysis and GCM boundary conditions to provide a full suite of simu lation options.

	Dynamical core. Similar to RegCM versions 2 and
	2.5, the dynamical core of RegCM3 is based on
	the hydrostatic version of the fifth-generation
	Pennsylvania State University-National Center for At
	mospheric Research (PSU-NCAR) Mesoscale Model
	(MMS;
		RegCMI	RegCM2	RegCM2.S	RegCMJ
	Primary references	Dickinson et al. ( 1989) Giorgi and Bates ( 1989)	Giorgi et al. (1993a,b)	Giorgi and Shields ( 1999) Pal et al. (2000)
	Dynamics	MM4 Anthes et al. ( 1987)	MMS (hydrostatic) Grell et al. (1994)	MMS (hydrostatic) Grell et al. (1994)	MMS (hydrostatic) Grell et al. (1994)
	Radiative	CCMI	CCM2	CCM3	CCM3
	transfer	Kiehl et al. ( 1987)	Briegleb ( 1992)	Kiehl et al. ( 1996)	Kiehl et al. (1996)
	Boundary	Local	Nonlocal, counter-gradient Nonlocal, counter gradient	Nonlocal, counter gradient
	layer	Deardorff ( 1972)	Holtslag et al. (1990)	Holtslag et al. (1990)	Holtslag et al. (1990)
	Land surface	BATS la Dickinson et al. (1986)	BATS le Dickinson et al. (1993)	BATS le Dickinson et al. ( 1993)	SUB BATS Giorgi et al. (2003a)
	Convective precipitation	Anthes-Kuo Anthes ( 1977)	Grell (1993) Anthes ( 1977)	Zhang and Macfarlane ( 1995) Grell ( 1993)	MIT (Emanuel 1991) Anthes-Kuo, Grell (1993)
	Resolvable	Implicit	Explicit	SIMEX	SU BEX

precipitation

[START_REF] Errico | A regional climate model for the western United States[END_REF]

Hsie et al. (1984) Giorgi and Shields ( 1999) Pal et al. (2000) Aerosols and Not available Not available Qian and Giorgi (1999) Selmon et al. (2006) chemistry (no dusts) Zakey et al. (2006)

of the model. Furthermore,


Fabrice Capoen
email: capoen@unicaen.fr

Jérôme Creel
email: creel@ofce.sciences-po.fr.

Pascal Cussy
email: pascal.cussy@unicaen.fr.

Hélène Lenoble-Liaud

How to manage speculative shocks : intra-european vs. international monetary coordination

r , real interest rate (%) T , taxes (% de PIB) d , public debt (% de PIB) a π , anticipated inflation rate of production price (Log) g , public spending (% de PIB) R , consumers' revenue (Log) d ~ , government public debt target (% de PIB) W ~ , desired consumers' wealth (% de PIB).

The literature on currency crisis has generally not answered to the following question: which economic policies may reduce the contagion effects of a speculative shock? We use a dynamic Mundell-Fleming model extended to four countries and compute three time-consistent equilibria: a Nash equilibrium, and Nash-bargaining equilibria, first between the central banks of the G3 (a target zone equilibrium) and, second between European governments and the ECB. The best equilibrium for the Fed, European and Japanese policymakers is intra-European coordination. It induces a very expansionary fiscal policy in the USA whose government hence rejects it. Extensions to the case of a Stability Pact in European countries do not alter our results. Introducing a Fed less conservative than the ECB or the BoJ provokes a change in US preferences: both authorities give priority to the monetary equilibrium and the US government is no longer isolationist.

JEL Classification : E61, E63, F43

How to manage speculative shocks : intra-european vs. international monetary coordination ♦ Fabrice Capoen (a) , Jérôme Creel (b)(c) , Pascal Cussy (a) , and Hélène Lenoble-Liaud (c) The financial and economic crisis in East-Asia occurred two years ago, and yet not only do the countries involved show some signs of recovery, but the crisis did not spread as much as it was supposed to. A rich literature has been devoted to this subject, focusing on the causes of the crisis, on the role, stabilising or not, played by the I.M.F., and on the lessons one can draw from the episode 1 , but little has been said about the macroeconomic impact of the shock on the non-Asian countries. It seems as if only the "target zone between the G3 currencies" controversy had caught the attention of economists 2 . This paper aims at comparing two international policy options when countries are confronted to a speculative asymmetric shock, such as the one that hit the Asian area 3 . Taking into account the practical difficulty to achieve coordination between every monetary and fiscal authority in every country, we restrict ourselves to evaluating the impact of a coordination among US, European and Japanese central banks (monetary equilibrium), and a coordination among French and German governments and the E.C.B (European equilibrium), that is to say an intra-European ♦ Helpful comments by Giorgio Basevi, Agnès Bénassy, Hélène Rey and Pierre Villa at the OFCE-T2M workshop on Macroeconomics in the EMU (november 19-20 th of 1999 in Paris) and the AFSE 1999 annual Congress (september 23-24 th of 1999 in Paris) are gratefully acknowledged. The usual disclaimer applies. (a) University of Caen, France. email: capoen@unicaen.fr; pascal.cussy@unicaen.fr. (b) Corresponding author: OFCE, Research Departement, 69, quai d'Orsay, 75340 Paris cedex 07, France; email: creel@ofce.sciences-po.fr . (c) CREFED, University of Paris IX-Dauphine, France. email: lenoble@dauphine.fr. 1 See the exhaustive papers by Corsetti et al.. (1998a,b). 2 The French and German proposition to impose limits on the fluctuations of the dollar, yen, and Euro exchange rates had its 'pros' (see Bergsten, 1998), and its 'cons' (Dornbusch, 1999). 3 We suppose that the Asian crisis implies a sudden and permanent decrease of the exogenous part of asset demands in yen. We do not discuss the causes of such a situation, and focus on the consequences instead.

coordination.

International monetary coordination consists in central banks limiting interest rate and exchange rate fluctuations so as to minimise a loss function. We do not impose ad hoc limits to these fluctuations: limits are endogenous4 . As the economic policies we define are time consistent, the problem of the lack of credibility of exchange rate bands of fluctuations vanishes. In the target zone theory, policymakers have to enforce the credibility of pre-determined bands of fluctuations. Here, we rather determine credible and consistent policies of reduction of the exchange rates fluctuations. This could be viewed as a soft target zone system, without governments involved in the process.

Our objective is to answer the following questions: should European authorities favour a coordination among themselves, compared to a soft target zone system, when confronted to a speculative crisis? Do E.U. partners agree with this point of view?

In the first section, we describe the model. In section two, we discuss the impact of an asymmetric speculative shock. In section three, we assess the advantages and drawbacks of the two kinds of coordination schemes. We go further by introducing a balanced budget rule in France and Germany, in order to study the macroeconomic impact of a tightening of fiscal conditions in Europe. Last, we introduce an asymmetry in the respective loss functions of the Fed, on the one hand, and the ECB and the BoJ, on the other: the Fed is supposed to be less conservative than the other central banks. Section five concludes.

The model

We use Capoen-Villa's model (1997) (CV in the rest of the paper) extended to four countries to tackle the issue of a speculative shock. This model is developed into a dynamic Mundell-Fleming framework and contains portfolio and wealth effects. We introduce the United States, Japan (representing the Asian economies), Germany and France. The last two countries are in a monetary union and their size is twice smaller as the one of the large countries, so that the United States, Europe and Japan have the same size.

We introduce three modifications to the CV model. First of all, as was already said, we add two countries and heterogeneous sizes. Then, as we focus on wealth effects in aggregate demand, we simplify the latter by not using the Hicksian definition of the private agents' wealth; we assume instead that households neither consume the returns on their financial assets, nor the capital gains on foreign assets net of exchange rate variations. Last, we rule out the balanced budget rule, as it is not required to stabilise the model in the long run. The introduction of the public debt on GDP ratio in the governments' loss functions is enough to stabilise its path 5 .

The model is dynamic 6 : public debt accumulation is taken into account; economic policy decisions are taken in an intertemporal framework and are time consistent. Expectations on the exchange rates and the economic policy strategies are rational. As far as inflation is concerned, expectations are myopic, but the outcome is the same as when price expectations are rational. It is in part due to the fact that wages are only partially indexed on prices in the short and medium term, and that prices and wages adjust slowly (see CV, pp. 19-20).

There are 12 equations for each country in the model, and 6 equations describing the demand for foreign assets from private agents 7 . The real bloc consists in an aggregate demand and a supply bloc. Variables have a subscript for time, a superscript for the country, with iF,G,JorU = representing respectively France, Germany, Japan and the United States. Their definitions are given in the appendix.

Except for assets F, all variables are expressed as deviations from the baseline.

aversion, on net foreign holdings by domestic agents. 5 We hence focus on active policies. We relax this assumption for France and Germany in section 4. 6 Long term and stability conditions can be found in CV. 7 Equations are shown in the appendix.

Aggregate demand (equation 1) depends on the households' income net of taxes (y-T), the real interest rate (r), the public spending (g), the trade balance (b), and a wealth effect. Household's income does not include the interests perceived on assets (public debt (d) and net foreign assets (φ)), which are saved and contribute to wealth accumulation. They have an indirect impact on aggregate demand through the wealth effect. Households are assumed to have some desired level for wealth 0 W ; their consumption-savings trade-off makes their effective wealth (the sum of public debt and net foreign assets) tend toward this desired level.

(1) iiiiiiii ttttttt1t10 yc(yT)rgb(dW) -- =--σ+++µφ+-

The trade balance for country i depends on the cyclical gap with each other country j (with ji ≠ ) and on the respective real exchange rate between country i and countries j:

(

2) iijjiijij tttxt ji b[n(yy)nx] ≠ =-+δ ∑
, where ij n is the degree of openness between country i and country j, ij x the real exchange rate between country i and country j, and δ a positive parameter which satisfies the Marshall-Lerner-Robinson condition.

The supply bloc consists in a wage-price loop: prices follow an expectations augmented Phillips curve. Desired production prices (p d ) depend on wages, the GDP, and financial costs, approximated by the real interest rate (equation 3). An interest rate growth increases inflation ceteris paribus, because firms pass the development costs on prices, and substitute work to capital, which puts pressure on wages. Production prices depend on past prices and current desired prices (equation 4). The desired wage depends on consumer prices (q) and the GDP (equation 5).

Consumer prices depend on current production prices and foreign prices (equation 7).

(3)

i t i t 1 i t id t r y v w p θ + + = (4) id t 1 i 1 t 1 i t p ) l 1 ( p l p - + = - (5) i t 0 i t 2 i t id t w y v q w + + λ = (6) id t 2 i 1 t 2 i t w ) l 1 ( w l w - + = - (7) ∑ ≠ + = i j ij t ij i t i t x n p q
The financial bloc includes an equation for the real interest rate, equal to the nominal interest rate minus expected inflation; an equation for the dynamics of public debt accumulation, which depends on interest burden and public primary deficit (equation 8); equations for the net foreign assets desired by private agents; the balance of payments, which depends on the valuation of foreign-currency denominated foreign assets (the terms with x in equation 9) 8 . This last point is crucial as far as the Asian crisis is in question, because the substantial amount of debt denominated in foreign currency in the Asian countries contributed to the turmoil.

Following CV, we assume that assets denominated in the domestic and foreign currencies are not perfectly substitutable: because of exchange risk, private agents want to hold only a share of their wealth or external debt in foreign currency; this share depends on the anticipated return differential9 . where y is and q are in log, φ, d, and g are in percentage of GDP, and i the nominal interest rate in percentage. ρ is the time preference, assumed to be constant, and d is the government ex ante desired public debt target. We put ρ equal to 0.75.

Each authority has four main targets: to stabilise the GDP at its potential level (we suppose it is satisfied at the baseline), to stabilise inflation, to meet the external constraint so that fluctuations in the exchange rate are stabilised, and to meet the intertemporal budget constraint of the government, taking into account the fact that public debt accumulation reduces the rooms for manoeuvre of economic policies 11 . In addition, policymakers wish to minimise the expensive use of the instruments 12 .

Table 1 gives the weights of the different targets in the loss functions. They are taken from CV's model. In a first stage, we have assumed that monetary and fiscal authorities had the same weights and targets all over the world. We relax this assumption in section 4.b.

Loss functions' parameters

α β γ δ ε η
Government 0.9 0.5 4.0 0.9 0.9 0.5 Central Bank 0.1 2.5 1.0 0.1 0.1 0.5

Source : CV (1996).

10 The ECB loss function is half the sum of the French and German central banks loss functions. 11 The qualitative results remain the same when one makes the assumption that central banks do not care about the state's budget balance (ε b = 0 and ε g = 1).

12 Fiscal policy is costly because of the time it takes to implement, and because it may be irreversible; monetary policy affects future growth through its impact on investment.

The weights in the numerical simulations show that governments are more concerned with real variables, as opposed to central banks. Central banks have a "conservative" behaviour.

We compute the equilibria as in Oudiz and Sachs (1985): policymakers follow time consistent economic policy rules in a rational expectations framework ('closed loops'). These rules can be either cooperative or not. The non-cooperative equilibrium is a Nash equilibrium. The coordinated equilibrium is attained through a Nash-bargaining procedure: it consists in maximising the net gains of coordination, that is to say the produce of the differences between the Nash equilibrium and the coordinated one 13 .

The exchange rate regimes are as follows. France and Germany are in monetary union in the Euro zone: they share the same central bank (the ECB), and have the same nominal interest rate (a stability pact is introduced in the fourth section). The dollar, the Yen and the Euro fluctuate freely against one another. Central banks are independent, and do not abide by the rules of a fixed exchange rate regime.

Multipliers confirm that the two small countries and the three large ones (the United States, Japan, and the European Union) are symmetric respectively. A permanent increase in public spending gives the same results in France and Germany. A shock in the E.U. has a different impact in France and Germany depending on whether it is symmetric or not. A permanent increase in the nominal interest rate has always the same impact in the countries hit by the shock. The multiplier effects have no relevance in the long run since the model is only stable when active endogenous policies are implemented. Otherwise, an increase in public spending results in a never-ending accumulation of public debt, in a permanent excess in demand through the wealth effect, and in hyperinflation. 13 The appendix in Oudiz and Sachs (1985) is enlightening. Our model has at least four main drawbacks. First, parameters are not estimated.

Short term multipliers

f g1 =+ j g1 =+ E i1 =+ j i1 =+
yf 2.1 -0.1 -1.5 0.2 yg 0.9 -0.1 -1.5 0.2 yj 0 3.0 0.2 -1.5 yu 0 -0.1 0.2 0.2 pf 0.3 0 -0.2 0.1 pg 0.2 0 -0.2 0.1 pj 0 0.5 0.1 -0.2 pu 0 0 0.1 0.1 eEj 1.6 -3.2 -2
Second, we assume that governments and central banks share the same vision of the economy. Third, we cannot compute regime changes because of the limitations imposed by the calculation of time consistent equilibria: price indexation remains partial in the long run 15 . Finally, in order to appraise the impact of the Asian crisis, we mingle the Asian countries (Thailand, South Korea, …) with Japan and do as if the Southeast Asian currencies were pegged on the Yen; this is not the case since they are mainly pegged on the Dollar.

Anyhow, the model allows us to study the impact of an asymmetric speculative 14 The reason why the exchange rate depreciates in the country whose public spending is increased is linked to the computation process in the framework of time-consistent equilibrium. The equilibrium is computed 'forward', as Sargent advises for unstable roots (see Sargent, 1987, pp.182-83). In the long run, the trade balance will be in deficit if public spending increased (output effect) so that the nominal exchange rate will depreciate in the long run. With rational expectations, the exchange rate depreciates immediately. 15 We get the same qualitative results with a full indexation. They are available from the authors upon request.

shock, while introducing time consistent, hence credible policies. Turner (1998) believes that the fact that policies were not credible in the countries hit by the Asian shock contributed to worsening the crisis. We characterise cooperative and noncooperative credible policies that could have stabilised these economies more quickly. We depart from recent works by Fair (1999) and McKibbin and Martin (1998). Fair estimates the impact of a 30% depreciation of the Asian currencies without policy response. Furthermore, he assumes that exchange rates' variations have no impact on the demand for foreign assets, which is not relevant in the case of Asia. McKibbin and Martin consider the impact of the shock on the Asian economies, without considering the international response.

Corsetti et al.. (1999) also use a macroeconomic model to study the impact of the Asian crisis. But they have a different objective in mind which is to assess the consequences of moral hazard on public debt, seignorage and inflation 16 . This is too specific a view according to us; we rather suppose that inflation comes first of all as a result of the devaluation. In Southeast Asia, inflation has been more important after and not before the crisis, except in Thailand. Last, Stiglitz (1999) also favours economic policies in response to a speculative shock, but he gives no indication about the kind of policy that could have been implemented and its external impact.

An asymmetric speculative shock

Among the problems besetting the Asian economies, the accumulation of foreign-currency denominated external debt (see table 3) played a predominant role.

In the years before the crisis the Asian countries resorted to the massive use of external debt, mainly taking the form of short term unhedged foreign-currency denominated liabilities, whose amount, between 1993 and 1997, doubled in South Korea, Indonesia and Thailand, was multiplied by seven in Philippines, and grew by 20 billion dollars in Malaysia (still net creditor in 1993). This source of financing is very destabilising, and makes the economy vulnerable to external shocks, for 16 The foreign capital withdrawal must be compensated with a fiscal policy; after the growth of public debt, agents expect an increase in prices which in turn provokes the depreciation of the currency and a financial instance depreciations that make the debt burden increase. collapse.

Net external debts (billion US dollars)

1993 1994 1995 1996 1997 The shock consists in an expected and permanent reduction in the exogenous part of the European and US households' desire to hold assets denominated in Yen17 .

This shock translates into an exogenous fall of one point of GDP of Japanese net external position.

At the Nash equilibrium between all authorities, the shock implies a drop in the Japanese output, in spite of the immediate depreciation of the Yen against the Dollar and the Euro. The income effect has a negative impact on aggregate demand:

Japanese households feel poorer after the shock even if the value of their foreigncurrency denominated assets increases owing to the appreciation of the Dollar and the Euro 18 . But the fall in output is, above all, the result of a tightening of the monetary policy. Higher nominal Japanese interest rates (+0.5 point in the short term) induce higher real rates despite higher inflation. Private investment and hence demand for goods are decreasing. The increase in nominal interest rate (1.4 point in the long term), aims at offsetting the drop in the net external position by attracting capital via higher yields on the assets denominated in Yen. As a result of inflationary pressures due to the increase in the real interest rate (it increases with desired production prices), and furthermore, because of the Yen depreciation, the fiscal policy is restrictive: public spending decreases by 0.3 point of GDP in the long run, and public debt diminishes by more than 2.5 points of GDP. Taking into account the negative impact of the external crisis, the policy mix chosen in the E.U. seems appropriate. The economic policies prevent the demand for goods from dropping while sustaining growth. The resulting growth of French, German, and US GDPs is modest, only half the decrease of the Japanese GDP. The wealth effect also helps in improving the Western countries' economic situation: the net external positions of these countries instantly benefit from the interest rate differential with Japan, despite the deterioration of the trade balances, and the capital losses occurring after the Yen depreciation. Public debts also increase. In the long run, the European and US households' wealths increase on average by nearly 2 points of GDP.

The model provides a realistic assessment of the impacts of the speculative crisis which occurred in East-Asian countries: a reversal of private capital inflows in Asia (a sudden decrease in the Yen denominated asset demand in the model); a depreciation of the Asian currencies; an increase in the nominal interest rate and a recession in Asia; a decrease in the nominal interest rate in the short term and GDP growth in the Western countries quite unaffected by the shock. We note that the consistent fiscal policy implemented in Japan is similar to the one advocated by the I.M.F. at the beginning of the crisis: tightening the budget in order to preserve credibility. But this has a drawback: it amplifies the negative impacts of the crisis.

19 This slight difference in the impact of the shock comes from the fact that the pattern of the policy mix is different in the United States and the E.U.: in the E.U., the E.C.B. is facing two governments, each of them acting as if the policies of the other one and of the E.C.B. were given. So it does not take into account the positive spillover its partners' policies generate on its output and on prices. Then each government runs a too expansionary policy (and more expansionary one than the US government), and the E.C.B. monetary policy is more expansionary than the Fed's.

Coordinating economic policies

Is there a way to improve the efficiency of economic policies when confronted to a speculative crisis? We assume the following alternative: either the three central banks coordinate their policies in order to reduce exchange rate fluctuations which have 'beggar-thy-neighbour' effects and therefore favour the contagion of the shock.

Or, taking into account the reluctance of monetary and fiscal US policymakers, the European countries decide to organise an internal coordination between the governments and the E.C.B. in order to cut the interest rate and public spending in the E.U.

The coordination of central banks (see figure 2) enables a decrease in exchange rate volatility between the three currencies, owing to the reduction in the interest rates differential between the United States and the E.U.. It nevertheless remains wider than at the Nash equilibrium between Japan and the other countries, which allows to compensate for the growing US and European trade deficits towards Japanese goods: anyway, this results in less volatile exchange rates.

Coordination implies a less restrictive monetary policy in Japan and more expansionary ones in the Western countries. However, the decline in output intensifies in Japan, and at the same time, the deviation of GDP from the baseline increases in the United States and the E.U., compared to the Nash equilibrium. The fall of the Japanese output is due to an internal coordination failure: fiscal policy becomes more restrictive than at the Nash equilibrium. But in the U.E. and the United States, fiscal policies are more expansionary, which also contributes to an improvement in these countries' economic outlook.

Nevertheless, the situation looks better in terms of consumer prices: they increase less in Japan, and decrease less in the other countries, because the Yen depreciation is less important. Less volatile exchange rates moderate prices variations. With a more stable economic environment, trade between Japan and its partners expands in the long run (trade balances are more important in absolute value than at the Nash equilibrium).

The European equilibrium (see figure 3), on its part, is definitely more favourable to the countries involved: when compared to the Nash equilibrium, GDP in each country keeps closer to its potential value in the medium and the long term.

The fall in desired consumers' prices is less substantial. The trade imbalance towards Japan is less substantial. Monetary and fiscal policies are less expansionary.

In accordance with these findings, it seems as if the public were too important at the Nash equilibrium. But this conclusion must be tempered: in fact, public expenditures in the two equilibria are almost the same.

The interest rate differential grows when going from the Nash to the European equilibrium, because the US policy remains nearly the same. It implies an appreciation of the Euro against the Dollar in the short run which decreases the value of the net external French and German Dollar-denominated assets, hence, in return, a slowdown of the GDP. Despite less expansionary policies in Europe, public debt on GDP ratios increase in France and Germany when compared to the Nash equilibrium. The coordination of European policies benefits somewhat to the Japanese economy: prices deviations from the baseline are lower than at the Nash (but higher than at the Monetary one). Unfortunately, recession is deeper than at the Nash equilibrium (but less pronounced than at the Monetary one). Time-consistent policies do not differ much from the ones implemented at the Nash equilibrium.

Japanese policymakers are no more activist than at the Nash equilibrium, and come to better results in terms of welfare (the central bank and government loss functions are at their minimal value, see table 4), because Japan takes advantage from the weaker depreciation of the Yen against the Euro.

In the United States, government must be more active in the short term in order to make up for the European authorities being less active: the US deficit and public debt tend to grow. It follows that the US monetary policy is less expansionary in the short and medium term.

Table 4 draws up a summary of the present discounted value of the fiscal and monetary authorities' losses in the four countries. We are now ready to answer more precisely the questions put forwrad in the introduction. According to these results, the European governments and the ECB are better off at the European equilibrium. So the ECB finds no interest in introducing target zones for the exchange rates when it is possible to implement an intra-European coordination of the economic policies. When it is not, the ECB does not care whether monetary or Nash equilibrium is chosen.

Present discounted value of the losses of each authority without a Pact

Central banks

It is interesting to point out that no authority enjoys a net gain when moving to the monetary equilibrium whatever the starting equilibrium. As far as the Fed is concerned, it prefers to let the European authorities implement a coordination of their policies. But this situation would induce an internal conflict between the US policymakers, as the US government would favour the Nash equilibrium. According to this government, the European equilibrium is the least favourable: the accumulation of public debt prevents it from using freely the fiscal regulation and increases its losses. So the US government is the intra-European coordination's only opponent; it follows an isolationist path.

Indeed, the Japanese policymakers, directly concerned by the shock, approve the best policy choice of the European authorities and the Fed. The intra-European coordination is less inflationary for the Japanese economy because of the smaller depreciation of the Yen against the Euro. Yet, this equilibrium aggravates the recession in Japan.

The present discounted values of gains from coordination are nonetheless very small, as Oudiz and Sachs (1985) first recorded. This is all the more the case at the monetary equilibrium. The European one is more efficient in improving the economic situation. The present discounted value of loss decrease is never higher than 1.3% when going from a Nash equilibrium to a coordinated one, and the average decrease amounts to 1%.

Note that we use a particular definition of the Nash equilibrium in the sense that the policymakers do not pay attention to the policy spillovers, but take the long term outcomes of their own policies into account, through the time-consistent equilibrium (closed loop). It could imply that the kind of Nash equilibrium studied here overestimates the efficiency of the policy response to the asymmetric shock. In a more realistic way, an authority which does not care about the present consequences of its policy on its partners, would not care about the long-term consequences either, and hence behave inconsistently. So the gains of coordination, whether monetary or European, certainly tend to be underestimated. To make sure, we would have to assess the difference between gains at the time inconsistent Nash equilibrium and the time consistent coordinated one. But we cannot compute inconsistent equilibria with the solving algorithm of the model.

However, there is a strong case for implementing an intra-European coordination. The current design of monetary and fiscal policies in the E.U. would have to be clarified. Is the pragmatism the ECB showed in the beginning of 1999 (a cut in nominal interest rates in April in order to fight an increase in unemployment in the large countries of the Euro zone, and the ECB standing by this decision until November despite the Euro depreciation) the sign of a better assignment of instruments to targets in the E.U.? Will fiscal policy succeed in curbing inflation in case the ECB decides to boost the economy ? One can regret the coordination of fiscal and monetary policy is not enclosed in a treaty, as are the ECB's statutes, the convergence criteria and the procedure in case of excessive deficits. At present, the ECB is not compelled to coordinate its policy with those of EU governments. In case of an economic upheaval, there remains large uncertainty on ECB's reactions: will the ECB refuse to cut its interest rate while governments resume increasing their spending, hence favouring excessive real interest rates and public deficits as in the early nineties ?

4. Two extensions.

a) The European Stability Pact.

We now consider the case in which European fiscal policies are constrained by the provisions of the "Growth and Stability Pact" (GSP). We assume that the two governments have no room for manoeuvre: as the impact of the crisis on GDP is too small (the decrease in the European GDPs is less than 0.75%), they cannot call upon the "deep recession argument". The two governments abide by a balanced budget rule: every increase in public spending is offset by an increase in taxes of the same amount. Public debt in percentage of GDP remains constant.

This balanced budget rule follows:

(13) iiiiiii tt1tt10t1 TvT(1v)[gr(d/100)(1r)(dd)] --- =+-+++-%% , with iF,G = and i v0.2 = .
Together with the government budget constraint, it ensures that the debt to GDP ratio reaches its ex ante desired target d .

The impacts of a balanced budget rule in Europe at the Nash equilibrium are as follows (see figure 4): public spending, offset by an increase in taxes, is more important, but gives the same result in terms of GDP, which attests that the European fiscal policy is less effective. But the constraint on monetary policy is alleviated, so it is less expansionary. As the cut in the European interest rate is smaller, the Japanese central bank has to be more activist in order to draw foreign capital: the Japanese interest rate increases more. The more restrictive monetary policy by the BoJ entitles the government to implement a less restrictive fiscal policy in the short and medium term. But in the long run, it involves an increase in public debt, and the Japanese government has to tight its spending more than at the equilibrium without balanced budget rules. When the impacts of the speculative shock are considered, the simulations show that the results obtained in sections 2 and 3 are not substantially altered by the introduction of the balanced budget rule. An intra-European coordination is still the equilibrium favoured by the European and Japanese authorities. Only the Fed has a different point of view: from now on, it prefers the monetary equilibrium (rather than intra-European coordination without the GSP), while the US government remains favourable to the Nash equilibrium. When there is no active fiscal policy in Europe, the US fiscal policy is less effective: debt to GDP ratio increases more than at the Nash equilibrium and monetary policy has to become less expansionary.

Should we infer from these results that the GSP has Pareto-superior properties as far as European countries are concerned, in comparison with the ones obtained without the Pact? Indeed, ECB's and German and French governments' losses have been reduced after the provisions of the Pact have been introduced. At first sight, there no doubt are advantages with this Pact. Looking at these results more acutely however, at Nash equilibrium for instance, we find that their Pareto-superiority is due to a large extent to a less active monetary policy (the European nominal interest rate varies less), to the reduction in EU public debts' fluctuations, and to the decrease in net financial assets between European countries and Japan.

As a counterpart, the Euro-Yen exchange rate volatility is more substantial; but this kind of variability has not been assumed to incur a peculiar cost to governments or central bankers in our model. Moreover, the adoption of the GSP gives rise to a trade-off between consumption prices and output which is more favourable to the former. Price deviations from the baseline in France and Germany are reduced from the short to the long run when these countries abide by the GSP ; the price fall in the long run is up to 0.2 point, whereas it was up to -0.3 point without a Pact. As for GDP deviations from the baseline, they are superior in the situation with the GSP than without. This trade-off confirms the explanations economists put forward in order to justify the GSP in economic terms (see Artis and Winkler, 1997, Eichengreen and Wyplosz, 1998): limitations over public deficits would resolve coordination failures with the ECB, failures whose occurrence would generate too large variations in the interest rates; these limitations would hence reduce the inflationary pressures which are commonly attributed to public debt rollover. Such a policy mix however faces a drawback: larger fluctuations of the GDPs (in relation to the situation without a GSP) might well occur in the European countries.

b) What happens if the Fed is less conservative than the ECB? 20

We finally turn to a situation with heterogeneous loss functions between the Fed, on the one hand, and the ECB and BoJ, on the other. In equations ( 11) and ( 12), for US authorities, we give the following values to α: GB 0.6and0.3 α=α= , for government and the central bank respectively. Hence, the relative aversion of the US government towards output in comparison with inflation falls from 1.8 to 1.2, whereas that of the Fed increases from 0.04 to 0.12. Weights' values in European and Japanese loss functions remain constant.

In this framework, the asymmetric speculative shock in Japan gives rise to less active fiscal and monetary policies in the US since their aversion towards price deviations is less pronounced than in the preceding sections. Hence, the Yen depreciation which provokes price falls in the US and EU does not exacerbate a large US nominal interest rate decrease.

Results in terms of output and prices are better for the US with a less conservative central bank; loss functions for government and the Fed are reduced in relation to their values with homogeneous loss functions 21 . One might conclude that US fiscal policies are more efficient than in preceding sections.

Since US policies are less active, Japanese ones are more: the fall in public spending increases from the situation with homogeneous loss functions to the case with heterogeneous ones and monetary policy is also more restrictive. Finally, despite a higher deviation of Japanese GDP from its baseline level, Japanese policymakers can reduce their loss functions: debt to GDP decreases and deviations of trade balances from the baseline are lower.

The macroeconomic consequences of this heterogeneity for European countries are favourable for GDP and prices deviations, which are reduced thanks to less expansionary fiscal and monetary policies. However, with higher debt to GDP ratios than in the situation with homogeneous loss functions, European governments incur larger losses; as for the ECB, it is better off when the Fed is less conservative than it (the ECB) is.

21 Remember that US loss functions in the present section do differ from that used in previous ones. Comparisons between these different situations, as far as the US policies are concerned, might therefore be used with caution. European and Japanese policymakers still give priority to intra-European coordination since they minimise their respective losses. Conclusions differ for the US. The fact that the Fed has less reluctance towards inflation in relation to output deviations is a good device because it resolves the internal coordination default with the government. In the present situation indeed, both US authorities prefer the monetary equilibrium. The fact that the Fed reacts less to the Yen depreciation and its price consequences limits the reaction of the government which is reluctant to increasing its debt to GDP ratio. Hence, it not compelled to implement 'excessive' fiscal policies which push its welfare loss up, as it was the case with a more conservative Fed.

Present discounted value of the losses of each authority with heterogeneous loss functions

Central banks

In this situation, with a pragmatic Fed and a price-stability-oriented ECB, the US government is no longer isolationist and therefore tends to contradict Dornbusch's point of view on target zones: if these zones were applied endogenously, limiting exchange rate fluctuations with the Yen would minimise its losses as well as those of the Fed.

Conclusion

These computations of a four-country dynamic Mundell-Fleming model show that when confronted to an asymmetric speculative shock, European authorities, via the coordination of their economic policies, can succeed in reducing some macroeconomic imbalances not only in their economies, but in the country directly hit by the shock. The coordination of policies in the E.U. generates net gains for the Japanese economy. But the design of this policy mix does not suit the US government, not because it induces more variability of inflation and GDP than the other equilibria, but because it implies a more active fiscal policy, which is expensive.

An international monetary coordination, that is to say the implementation of target zones between the three main currencies, is not an optimal answer to macroeconomic imbalances in the countries concerned here, except for the USA when the Fed is less conservative than the ECB and the BoJ. The decrease in the central banks present discounted value of losses due to less volatility of the exchange rates is very small, which is not surprising within the G3. France and Germany together in the Euro zone are much less open to international trade than they were before January, 1 st , 1999. A policy of "benign neglect" can henceforth be implemented in the E.U.; it follows that the European countries feel less concerned by exchange rate agreements such as target zones than before the creation of the EU.

Last, we must underline the main advantage of the kind of model used here: the equilibria are time consistent. Implemented policies are credible, and short-term

  the government public debt target, ij F for assets of country j owned by agents of country i denominated in country i currency, in real terms, and ij φ for net external assets of country i vis-à-vis country j.Economic policies are described through reaction functions, which are obtained by the minimisation of loss functions. Each authority controls one instrument.Governments use public spending in order to minimise the following

Figure 1 :

 1 Figure 1: Nash equilibrium

Figure 2 :

 2 Figure 2: Monetary Equilibrium

Figure 3 :

 3 Figure 3: European Equilibrium

Figure 4 :

 4 Figure 4: Nash equilibrium with GSP

Figure 5 :

 5 Figure 5: Nash equilibrium with heterogeneous loss functions

  Source : BIS (from Corsetti et alii, 1998a), computations by the authors.

							deviation	97/96
							1993-97	(in %)
	Korea	30.0 40.4 58.2 80.1 62.5	32.5	-22.0
	Indonesia	24.6 31.2 37.4 44.2 51.2	26.6	15.8
	Malaysia	-3.2	4.2	5.7	8.4 16.1	19.3	91.7
	Philippines	0.8	-0.2	0.7	5.7	6.9	6.1	21.1
	Singapore	78.4 94.6 111.8 109.4 81.2	2.8	-25.8
	Thailand	29.7 47.4 80.4 90.3 69.8	40.1	-22.7
	Hong Kong	123.0 148.8 183.3 185.6 174.8	51.8	-5.8
	Taiwan	-3.2	4.2	5.7	8.4 16.1	19.3	91.7

5 .

 5 Present discounted value of losses of the different authorities at the Nash equilibrium

			Central banks		Governments
		ECB	Fed	BoJ	Ger.	Fra.	USA	Japan
	Without GSP* 0.407	0.490	2.470	1.238	1.238	1.281	8.495
	GSP**	0.290	0.545	2.344	1.165	1.165	1.641	7.573
	* Without balanced budget rule. ** With balanced budget rule in France and Germany.
	6. Present discounted value of the losses of each authority with the GSP
		Central banks		Governments
		ECB	Fed	BoJ	Ger.	Fra.	USA	Japan
	Nash	0.290	0.545	2.344	1.165	1.165	1.641*	7.573
	Monet	0.289	0.541*	2.342	1.240	1.240	1.691	7.970
	Europ.	0.277*	0.567	2.266*	1.082*	1.082*	1.887	7.166*

* Optimal situation for each authority.

7. Appendix : The model F

  stands for France, G for Germany, J for Japan, U for the United States et E for

	the EMU
	j i = ,		F	,			G	,			, J	U	.
	a) Equations
	(1)	y	i t		=		cR	i t			-	r t i σ	+	g	i t	+	b	i t	+	µ	( φ	i t	1 -	+	d	i t	1 -	-	W 0	)
	(2)	R	i t		=	y	i t				-	i t T
	(3)	i t T	=	i t T -1
	(4) iijjiijij tttxt ji b[n(yy)nx] ≠ =-+δ ∑
	(5)	p	id t		=	w		i t		+	v	1	y	i t	+	i t r θ
	(6)	p	i t		=		1 l	p	i t	1 -			+	1 (	-	1 l	)	p	id t
	(7)	w	id t		=	λ	q	i t			+	v	2	y	i t	+	w	i 0	t
	(8)	w	i t		=	l	2	w	i t	1 -	+	1 (	-	l	2	)	w	id t
	(9)	q	i t		=		p	i t			+		∑ i j ≠		n	ij	x	ij t
	(10) iiiiii tt1t10t1tt ddr(d/100)r(dd)gT ---=++-+-%%
	(11a)	i t r		=	i	E t			-	π	ia t + 1	for	i =	, F	G
	(11b)		i t r		=	i	i t			-	π	ia t + 1	for	i =	, J	U
	(12)	π	ia t + 1	=			p	i t			-	p	i t	1 -
	(13a)		x	FG t		=		p	G t		-	p	F t
	(13b)		x	ij t	=			p	j t			-		p	i t	+	e	Ej t	for	i =	, F	G	and	j =	, J	U
	(13c)		x		UJ t	=		p		J t	-	p	U t	+	e	UJ t
	(14a)	e	Eja 1 t +	=		e Ej t	+	i (	j t	-	i	E t	)	+	k	( φ	Fj t	+	φ	Gj t	)	for	j =	, J	U
	(14b)		e	UJ 1 t +		=	e	UJ t		+	(	i	U t	-	i	J t	)	+	k	φ	UJ t
	(15a)	F t ij	=			F 0			+		k 1 6	(	e ija 1 t +	-	e	ij t	+	i	j t	-	i	E t	)	for	i =	, F	G	and	j =	, J	U
	(15b)		F t	ji	=				F 0		-	k 1 6	e (	ija 1 t +	-	e	ij t	+	i	j t	-	i	E t	)	for	i =	, F	G	and	j =	, J	U

Our 'soft target zones' will resemble those of Hughes[START_REF] Hallett | Exchange Rates and Asymmetric Policy Regimes: When Does Exchange Rate Targeting Pay?[END_REF][START_REF] Hallett | When Do Target Zones Work? An Examination of Exchange Rate Targeting as a device for Coordinating Economic Policies[END_REF], except that we do not introduce nominal exchange rates in authorities' loss functions. Central banks limit interest rate swings ; in a portfolio-type model (see[START_REF] Branson | Exchange Rate Dynamics and Monetary Policy[END_REF], variations in interest rates impinge on exchange rate expectations and due to risk

For a theoretical justification, see[START_REF] Bénassy | La détermination des taux de change dans les modèles multinationaux : l'état de l'art[END_REF].

See[START_REF] Branson | Exchange Rate Dynamics and Monetary Policy[END_REF] and[START_REF] Bleuze | L'interdépendance des économies en changes flexibles : les apports d'une maquette dynamique[END_REF].

The endogenous part of Japanese capital flows might well be superior to its exogenous part; in short, the shock does not prevent the capacity of Japan from attracting net capital flows.

Remember that in this version of the CV model, agents do not consume the capital gains on their assets.

We thank Giorgio Basevi for suggesting this extension.

policy dilemmas between government and the central bank concerning the assignment of instruments to objectives do vanish. Although the method of computation of time consistent equilibria is complex, our next step will be to justify the model's calibration. We intend to simulate the model using the Monte Carlo method, as Söderlind (1999) recently did with a simpler model. We leave this for future research. ( 15c) q , consumer price (Log) ij b , trade balance of country towards country j denominated in money i (% of PIB) ij e , nominal exchange rate (Log, a monetary unit of country j is worth ij e monetary units of country i)

b) Parameters' values and baseline calibrations for the variables

x , real exchange rate (Log) ij F , assets of country j owned by agents of country i denominated in country i currency, in real terms (% of GDP) ij φ , net external assets of country i towards country j (% of GDP)