Time inconsistency and free-riding in a monetary union

Varadarajan V. Chari, Patrick J. Kehoe

Research output: Contribution to journalArticlepeer-review

38 Scopus citations


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.

Original languageEnglish (US)
Pages (from-to)1329-1356
Number of pages28
JournalJournal of Money, Credit and Banking
Issue number7
StatePublished - Oct 2008


  • Dollarization
  • European Union
  • Fixed exchange rates
  • Maastricht Treaty
  • Monetary regime


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