Time Consistency and Free-Riding in a Monetary Union
AbstractWe analyze the setting of monetary and nonmonetary policies in monetary unions. We show that in these unions a time inconsistency problem in monetary policy leads to a novel type of free- rider problem in the setting of nonmonetary policies, such as labor market policy, fiscal policy, and bank regulation. The free-rider problem leads the union's members to pursue lax nonmonetary policies that induce the monetary authority to generate high inflation. The free-rider problem can be mitigated by imposing constraints on the nonmonetary policies, like unionwide rules on labor market policy, debt constraints on members' fiscal policy, and unionwide regulation of banks. When there is no time inconsistency problem, there is no free-rider problem, and constraints on nonmonetary policies are unnecessary and possibly harmful.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9370.
Date of creation: Dec 2002
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Publication status: published as Varadarajan V. Chari & Patrick J. Kehoe, 2008. "Time Inconsistency and Free-Riding in a Monetary Union," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(7), pages 1329-1356, October.
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- Varadarajan V. Chari & Patrick J. Kehoe, 2008. "Time Inconsistency and Free-Riding in a Monetary Union," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(7), pages 1329-1356, October.
- V. V. Chari & Patrick J. Kehoe, 2010. "Time Inconsistency and Free-Riding in a Monetary Union," Levine's Working Paper Archive 506439000000000084, David K. Levine.
- V. V. Chari & Patrick J. Kehoe, 2008. "Time inconsistency and free-riding in a monetary union," Staff Report 308, Federal Reserve Bank of Minneapolis.
- F3 - International Economics - - International Finance
- F31 - International Economics - - International Finance - - - Foreign Exchange
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-12-09 (All new papers)
- NEP-DGE-2002-12-09 (Dynamic General Equilibrium)
- NEP-IFN-2002-12-09 (International Finance)
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