On the Desirability of Fiscal Constraints in a Monetary Union
Varadarajan V. Chari
University of Minnesota - Twin Cities - Department of Economics; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER)
Patrick J. Kehoe
Federal Reserve Bank of Minneapolis - Research Department; University of Minnesota - Twin Cities - Department of Economics; National Bureau of Economic Research (NBER)
November 1, 2003
The desirability of fiscal constraints in monetary unions depends critically on whether the monetary authority can commit to follow its policies. If it can commit, then debt constraints can only impose costs. If it cannot commit, then fiscal policy has a free-rider problem, and debt constraints may be desirable. This type of free-rider problem is new and arises only because of a time inconsistency problem.
Keywords: Free Riding Problem, Growth and Stability Pact, Time Consistency, International Cooperation
JEL Classification: E4, E42, E5, E58, F3, F31, F33, F36working papers series
Date posted: July 30, 2008
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