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 language | English (US) |
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Pages (from-to) | 1329-1356 |
Number of pages | 28 |
Journal | Journal of Money, Credit and Banking |
Volume | 40 |
Issue number | 7 |
DOIs | |
State | Published - Oct 2008 |
Keywords
- Dollarization
- European Union
- Fixed exchange rates
- Maastricht Treaty
- Monetary regime