Time Consistency and Free-Riding in a Monetary Union
30 Pages Posted: 6 Dec 2002 Last revised: 10 Aug 2022
Date Written: December 2002
Abstract
We analyze the setting of monetary and nonmonetary policies in monetary unions. We show that in these unions a time inconsistency problem in monetary policy leads to a novel type of free- rider problem in the setting of nonmonetary policies, such as labor market policy, fiscal policy, and bank regulation. The free-rider problem leads the union's members to pursue lax nonmonetary policies that induce the monetary authority to generate high inflation. The free-rider problem can be mitigated by imposing constraints on the nonmonetary policies, like unionwide rules on labor market policy, debt constraints on members' fiscal policy, and unionwide regulation of banks. When there is no time inconsistency problem, there is no free-rider problem, and constraints on nonmonetary policies are unnecessary and possibly harmful.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Symbiosis of Monetary and Fiscal Policies in a Monetary Union
By Avinash Dixit and Luisa Lambertini
-
Interactions of Commitment and Discretion in Monetary and Fiscal Policies
By Luisa Lambertini and Avinash Dixit
-
One Money, But Many Fiscal Policies in Europe: What are the Consequences?
By Harald Uhlig
-
One Money, But Many Fiscal Policies in Europe: What are the Consequences?
By Harald Uhlig
-
Is Fiscal Policy Coordination in Emu Desirable?
By Roel M. W. J. Beetsma, Xavier Debrun, ...
-
Is Fiscal Policy Coordination in Emu Desirable?
By Roel M. W. J. Beetsma, Xavier Debrun, ...
-
Is Fiscal Policy Coordination in Emu Desirable?
By Roel M. W. J. Beetsma, Xavier Debrun, ...
-
Fiscal Discretion Destroys Monetary Commitment
By Avinash Dixit and Luisa Lambertini
-
The Gains from Fiscal Cooperation in the Two Commodity Real Trade Model
-
Model Uncertainty, Learning, and the Gains from Coordination
By Atish R. Ghosh and Paul R. Masson