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On the desirability of fiscal constraints in a monetary union

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  • V. V. Chari
  • Patrick J. Kehoe

Abstract

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.

Suggested Citation

  • V. V. Chari & Patrick J. Kehoe, 2003. "On the desirability of fiscal constraints in a monetary union," Staff Report 330, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:330
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    Cited by:

    1. V. V. Chari & Larry E. Jones & Ramon Marimon, 2004. "Strategic Delegation in Monetary Unions," Manchester School, University of Manchester, vol. 72(s1), pages 19-33, September.
    2. Michael D. Bordo & Harold James, 2008. "A Long Term Perspective on the Euro," NBER Working Papers 13815, National Bureau of Economic Research, Inc.
    3. Michael D. Bordo & Lars Jonung & Agnieszka Markiewicz, 2013. "A Fiscal Union for the Euro: Some Lessons from History ," CESifo Economic Studies, CESifo, vol. 59(3), pages 449-488, September.
    4. Bodo Herzog, 2004. "Warum verstoßen vorwiegend die großen EWU-Länder gegen den Stabilitäts- und Wachstumspakt?: Eine theoretische Beweisaufnahme," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 73(3), pages 405-417.
    5. Giancarlo Corsetti & Michael P. Devereux & John Hassler & Tim Jenkinson & Gilles Saint-Paul & Hans-Werner Sinn & Jan-Egbert Sturm & Xavier Vives, 2009. "Chapter 1: The European Economy: Macroeconomic Outlook and Policy," EEAG Report on the European Economy, CESifo, vol. 0, pages 11-57, February.
    6. Lindbeck, Assar & Niepelt, Dirk, 2004. "Improving the SGP: Taxes and Delegation rather than Fines," Working Paper Series 633, Research Institute of Industrial Economics.
    7. Piotr Lewandowski & Marek Antosiewicz & Jan Baran & Iga Magda & Monika Potoczna & Maciej Lis & Joanna Tyrowicz & Agnieszka Kaminska & Jan Hagemejer & Karol Pogorzelski, 2013. "Employment in Poland 2012. Labour Market During the Recovery from the Crisis," Books and Reports published by IBS, Instytut Badan Strukturalnych, number zwp2012 edited by Piotr Lewandowski & Iga Magda, january.
    8. Hubert Kempf & Leopold von Thadden, 2007. "On policy interactions among nations: when do cooperation and commitment matter ?," 2007 Meeting Papers 801, Society for Economic Dynamics.
    9. Herzog, Bodo, 2005. "Why do bigger countries have more problems with the Stability and Growth Pact?," University of Göttingen Working Papers in Economics 40, University of Goettingen, Department of Economics.
    10. repec:got:cegedp:40 is not listed on IDEAS
    11. Pogorelec, Sabina, 2006. "Fiscal and monetary policy in the enlarged European Union," Working Paper Series 655, European Central Bank.
    12. Bonatti, Luigi & Cristini, Annalisa, 2008. "Breaking the Stability Pact: Was it predictable?," Journal of Policy Modeling, Elsevier, vol. 30(5), pages 793-810.
    13. Chari, V.V. & Kehoe, Patrick J., 2007. "On the need for fiscal constraints in a monetary union," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2399-2408, November.
    14. Østrup, Finn, 2005. "Fiscal Policy and Welfare under Different Exchange Rate Regimes," Working Papers 2005-1, Copenhagen Business School, Department of Finance.
    15. Landon, Stuart & Smith, Constance E., 2007. "Government debt spillovers in a monetary union," The North American Journal of Economics and Finance, Elsevier, vol. 18(2), pages 135-154, August.
    16. Philippe Michel & Leopold Von Thadden & Jean‐Pierre Vidal, 2010. "Debt Stabilizing Fiscal Rules," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 12(5), pages 923-941, October.
    17. Peter Claeys & Raúl Ramos & Jordi Suriñach, 2008. "Testing the FTPL across government tiers," IREA Working Papers 200812, University of Barcelona, Research Institute of Applied Economics, revised Oct 2008.
    18. S. Tolga Tiryaki, 2008. "Has the Stability and Growth Pact Changed the Likelihood of Excessive Deficits in the European Union?," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 8(1), pages 65-83.
    19. Marco Bassetto & Vadym Lepetyuk, 2007. "Government investment and the European stability and growth pact," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 31(Q III), pages 33-43.
    20. S�verine Menguy, 2014. "Taxation Rates and Stabilization in the Framework of Supply-side Distortions," International Economic Journal, Taylor & Francis Journals, vol. 28(1), pages 95-120, March.
    21. Assar Lindbeck & Dirk Niepelt, 2006. "The Stability Pact – Rationales, Problems, Alternatives," Kyklos, Wiley Blackwell, vol. 59(4), pages 579-600, November.
    22. Oliver Grimm & Stefan Ried, 2007. "Macroeconomic Policy in a Heterogeneous Monetary Union," CER-ETH Economics working paper series 07/67, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.

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    More about this item

    Keywords

    monetary unions; Fiscal policy;

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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