Creator: Chari, V. V. and Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 589 Abstract:
We show that the desirability of fiscal constraints in monetary unions depends critically on the extent of commitment of the monetary authority. If the monetary authority can commit to its policies, fiscal constraints can only impose costs. If the monetary authority cannot commit, there is a free-rider problem in fiscal policy, and fiscal constraints may be desirable.
Keyword: International cooperation, Free riding problem, Time inconsistency, and Growth and stability pact Subject (JEL): F31 - Foreign Exchange, E58 - Central Banks and Their Policies, F33 - International Monetary Arrangements and Institutions, E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems, and F36 - Financial Aspects of Economic Integration