Staff Report 330

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On the Desirability of Fiscal Constraints in a Monetary Union

V. V. Chari - Consultant
Patrick J. Kehoe - Consultant

Published November 1, 2003

Abstract
The desirability of fiscal constraints in monetary unions depends critically on whether the monetary authority can commit to follow its policies. If it can commit, then debt constraints can only impose costs. If it cannot commit, then fiscal policy has a free-rider problem, and debt constraints may be desirable. This type of free-rider problem is new and arises only because of a time inconsistency problem.


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