Working Paper: NBER ID: w10232
Authors: VV Chari; Patrick J. Kehoe
Abstract: 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.
Keywords: No keywords provided
JEL Codes: F3; F4; F41; F42; F33; E5; E58; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary authority can commit to future policies (E61) | Imposing fiscal constraints on member states will not increase welfare (D69) |
| Time inconsistency in monetary policy (E61) | Freerider problem in fiscal policy (H40) |
| Monetary authority has an incentive to inflate away nominal debt (E31) | Higher inflation rates (E31) |
| Increased debt issuance by fiscal authority (H63) | Higher inflation (E31) |
| Absence of commitment (J22) | Fiscal constraints improve welfare (D69) |
| Reputational benefits (L14) | Resolve time inconsistency problem (D74) |