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Fiscal Contracts for a Monetary Union

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  • Florin O. Bilbie

Abstract

This paper suggests that in a monetary union: (i) fiscal policies should be delegated with optimal contracts, perhaps written over the deficit; (ii) policymakears 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 Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 2005-W11.

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Date of creation: 01 Mar 2005
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Handle: RePEc:oxf:wpaper:2005-w11

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  1. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
  2. Roel Beetsma & Xavier Debrun & Franc Klaassen, 2001. "Is Fiscal Policy Coordination in EMU Desirable?," IHEID Working Papers 04-2001, Economics Section, The Graduate Institute of International Studies.
  3. Beetsma, Roel & Bovenberg, A Lans, 2001. "Structural Distortions and Decentralized Fiscal Policies in EMU," CEPR Discussion Papers 2851, C.E.P.R. Discussion Papers.
  4. Beetsma,Roel M.W.J. & Bovenberg,A. Lans, 1995. "Monetary union without fiscal coordination may discipline policymakers," Research Memorandum 024, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  5. Artis, Michael J & Winkler, Bernhard, 1997. "The Stability Pact: Safeguarding the Credibility of the European Central Bank," CEPR Discussion Papers 1688, C.E.P.R. Discussion Papers.
  6. 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.
  7. Beetsma, Roel & Jensen, Henrik, 2003. "Contingent deficit sanctions and moral hazard with a stability pact," Journal of International Economics, Elsevier, vol. 61(1), pages 187-208, October.
  8. Bernheim, B. Douglas & Peleg, Bezalel & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria I. Concepts," Journal of Economic Theory, Elsevier, vol. 42(1), pages 1-12, June.
  9. Bergin, Paul R., 2000. "Fiscal solvency and price level determination in a monetary union," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 37-53, February.
  10. Banerjee, Gaurango, 2001. "Rules and discretion with common central bank and separate fiscal authorities," Journal of Economics and Business, Elsevier, vol. 53(1), pages 45-68.
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