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Time Inconsistency and Free-Riding in a Monetary Union

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  • V. V. Chari
  • Patrick J. Kehoe

Abstract

In monetary unions, a time inconsistency problem in monetary policy leads to a novel type of free-rider problem in the setting of non-monetary policies. The free-rider problem leads union members to pursue lax non-monetary policies that induce the monetary authority to generate high inflation. Free-riding can be mitigated by imposing constraints on non-monetary policies. Without a time inconsistency problem, the union has no free-rider problem; then constraints on non-monetary policies are unnecessary and possibly harmful. This theory is here detailed and applied to several non-monetary policies: labor market policy, fiscal policy, and bank regulation. Copyright (c) 2008 Federal Reserve Bank of Minneapolis with Exclusive License to Print by The Ohio State University.
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  • 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.
  • Handle: RePEc:cla:levarc:506439000000000084
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    JEL classification:

    • F3 - International Economics - - International Finance
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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