On the Desirability of Fiscal Constraints in a Monetary Union, Issue 10232
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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1050 Massachusetts Avenue analysis Arslanalp Peter Blair assume authority can commit benchmark model budget constraints Bureau of Economic choose their debt chooses a debt commitment to future common inflation rate constraints are desirable Cooper and Kempf cooperative allocations cooperative regime costs debt constraints debt contracts debt-contracting rules denote Desirability of Fiscal Discount Factor domain name Economic Research equilibrium allocations fiscal authority fiscal constraints Foreign free-rider problem full subscription given government consumption government debt government of country governments choose inconsistency problem issue nominal debt Kehoe lenders who live modified model monetary authority chooses monetary policy rule National Bureau NBER Working Paper nominal interest rate noncooperative and cooperative noncooperative equilibrium noncooperative regime objective functions output in period PAPER SERIES Partial Subscription Peter Blair Henry policy rule ir(x problem in monetary Proposition real interest rates reduce welfare Robert saving decisions solves 15 Uhlig union depends critically union's monetary authority V.V. Chari xi/n