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Fiscal Contracts for a Monetary Union

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  • Florin Bilbiie

    (HEC Paris - Recherche - Hors Laboratoire - HEC Paris - Ecole des Hautes Etudes Commerciales)

Abstract

This 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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Florin Bilbiie, 2001. "Fiscal Contracts for a Monetary Union," Working Papers hal-00515663, HAL.
    • Handle: RePEc:hal:wpaper:hal-00515663
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