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On the desirability of fiscal constraints in a monetary union

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Author Info
V.V. Chari
Patrick J. Kehoe

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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.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 330.

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Date of creation: 2003
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Handle: RePEc:fip:fedmsr:330

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Keywords: Monetary unions ; Fiscal policy;

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This paper has been announced in the following NEP Reports: This item is featured on the following reading lists:
  1. Canadian Macro Study Group
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Dixit, Avinash & Lambertini, Luisa, 2001. "Monetary-fiscal policy interactions and commitment versus discretion in a monetary union," European Economic Review, Elsevier, vol. 45(4-6), pages 977-987, May. [Downloadable!] (restricted)
  2. Beetsma, Roel & Uhlig, Harald, 1999. "An Analysis of the Stability and Growth Pact," Economic Journal, Royal Economic Society, vol. 109(458), pages 546-71, October. [Downloadable!] (restricted)
  3. von Hagen, Jurgen & Eichengreen, Barry, 1996. "Federalism, Fiscal Restraints, and European Monetary Union," American Economic Review, American Economic Association, vol. 86(2), pages 134-38, May. [Downloadable!] (restricted)
  4. Chari, V V & Kehoe, Patrick J, 1990. "International Coordination of Fiscal Policy in Limiting Economies," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 617-36, June. [Downloadable!] (restricted)
    Other versions:
  5. Uhlig, Harald, 2002. "One Money, but Many Fiscal Policies in Europe: What Are the Consequences?," CEPR Discussion Papers 3296, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. Sibert, Anne, 1992. "Government finance in a common currency area," Journal of International Money and Finance, Elsevier, vol. 11(6), pages 567-578, December. [Downloadable!] (restricted)
    Other versions:
  7. Russell W. Cooper & Hubert Kempf., 2001. "Dollarization and the conquest of hyperinflation in divided societies," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 3-12. [Downloadable!]
  8. Buiter, Willem H & Corsetti, Giancarlo & Roubini, Nouriel, 1992. "`Excessive Deficits': Sense and Nonsense in the Treaty of Maastricht," CEPR Discussion Papers 750, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  9. Stephen Ching & Michael B. Devereux, 2003. "Mundell Revisited: a Simple Approach to the Costs and Benefits of a Single Currency Area," Review of International Economics, Blackwell Publishing, vol. 11(4), pages 674-691, 09. [Downloadable!] (restricted)
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  10. Juan Pablo Nicolini & Josefina Posadas & Juan Sanguinetti & Pablo Sanguinetti & Mariano Tommasi, 2002. "Decentralization, Fiscal Discipline in Sub-National Governments and the Bailout Problem: The Case of Argentina," RES Working Papers 3160, Inter-American Development Bank, Research Department. [Downloadable!]
  11. Canzoneri, Matthew B. & Diba, Behzad T., 1991. "Fiscal deficits, financial integration, and a central bank for Europe," Journal of the Japanese and International Economies, Elsevier, vol. 5(4), pages 381-403, December. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. V.V. Chari & Larry E. Jones & Ramon Marimon, 2004. "Strategic Delegation in Monetary Unions," Economics Working Papers 842, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  2. Assar Lindbeck & Dirk Niepelt, 2005. "Improving the SGP: Taxes and Delegation rather than Fines," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  3. Sabina Pogorelec, 2006. "Fiscal and monetary policy in the enlarged European Union," Working Paper Series 655, European Central Bank. [Downloadable!]
  4. Bodo Herzog, 2005. "Why do bigger countries have more problems with the Stability and Growth Pact?," cege – Center for European, Governance and Economic Development Research Discussion Papers 40, cege – Center for European, Governance and Economic Development Research, University of Goettingen (Germany).. [Downloadable!]
  5. Oliver Grimm & Stefan Ried, 2007. "Macroeconomic Policy in a Heterogeneous Monetary Union," SFB 649 Discussion Papers SFB649DP2007-028, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
    Other versions:
  6. Michael D. Bordo & Harold James, 2008. "A Long Term Perspective on the Euro," NBER Working Papers 13815, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Marco Bassetto & Vadym Lepetyuk, 2007. "Government Investment and the European Stability and Growth Pact," NBER Working Papers 13200, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. Østrup, Finn, 2005. "Fiscal Policy and Welfare under Different Exchange Rate Regimes," Working Papers 2005-1, Copenhagen Business School, Department of Finance. [Downloadable!]
  9. 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.
  10. 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. [Downloadable!]
  11. Philippe Michel & Leopold von Thadden & Jean-Pierre Vidal, 2006. "Debt stabilizing fiscal rules," Working Paper Series 576, European Central Bank. [Downloadable!]
    Other versions:
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