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Time Inconsistency and Free-Riding in a Monetary Union

Listed author(s):
  • V. V. Chari
  • Patrick J. Kehoe

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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Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 506439000000000084.

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Date of creation: 09 Dec 2010
Handle: RePEc:cla:levarc:506439000000000084
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  4. Giovannini, A. & Spaventa, L., 1990. "Fiscal Rules in the Europen Monetary Union: A No-Entry Clause," Papers 8, Roma "la Sapienza" - Scienze Economiche.
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  7. 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 617-636, June.
  8. V. V. Chari & Patrick J. Kehoe & Edward C. Prescott, 1988. "Time consistency and policy," Staff Report 115, Federal Reserve Bank of Minneapolis.
  9. 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.
  10. Uhlig, H.F.H.V.S., 2002. "One Money, But Many Fiscal Policies in Europe : What are the Consequences?," Discussion Paper 2002-32, Tilburg University, Center for Economic Research.
  11. Sibert, Anne, 1992. "Government finance in a common currency area," Journal of International Money and Finance, Elsevier, vol. 11(6), pages 567-578, December.
  12. 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," Research Department Publications 3160, Inter-American Development Bank, Research Department.
  13. 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.
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