Time inconsistency and free-riding in a monetary union

Research output: Contribution to journalArticle

26 Citations (Scopus)

Abstract

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)1329-1355
Number of pages27
JournalJournal of Money, Credit and Banking
Volume40
Issue number7
DOIs
StatePublished - Oct 1 2008

Fingerprint

Monetary union
Time inconsistency
Free-riding
Free-rider problem
Authority
Labour market policy
High inflation
Monetary policy
Fiscal policy
Bank regulation

Keywords

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

Cite this

Time inconsistency and free-riding in a monetary union. / Chari, Varadarajan V.; Kehoe, Patrick J.

In: Journal of Money, Credit and Banking, Vol. 40, No. 7, 01.10.2008, p. 1329-1355.

Research output: Contribution to journalArticle

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