Fiscal Contracts for a Monetary Union
AbstractThis paper suggests that in a monetary union: (i) fiscal policies should be delegated with optimal contracts, perhaps written over the deficit; (ii) policymakers would have no incentives to deviate by forming coalitions from the resulting equilibrium when exchange of information is allowed for. In a model of a monetary union with decentralized fiscal authorities and both fiscal-fiscal and fiscal-monetary spillovers, individual policymaking is inefficient whereas binding agreements are unfeasible. A centralised equilibrium is optimal and time consistent if the policymaker shares the social preferences and uses non-distortionary fiscal instruments. When policy is decentralized with heterogenous preferences of authorities and fiscal policy is distortionary, the resulting equilibrium is always inefficient and stable to incentives to collude. The optimal policy mix can however be implemented in the decentralized game, via delegating all policies (by the same principal) where the resulting equilibrium is efficient and coalition-proof.
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Bibliographic InfoPaper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2005-W11.
Length: 21 pages
Date of creation: 10 Mar 2005
Date of revision:
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Web page: http://www.nuff.ox.ac.uk/economics/
Other versions of this item:
- NEP-ALL-2006-03-18 (All new papers)
- NEP-CBA-2006-03-18 (Central Banking)
- NEP-MAC-2006-03-18 (Macroeconomics)
- NEP-PBE-2006-03-18 (Public Economics)
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