Working Paper 589

On the Need for Fiscal Constraints in a Monetary Union

Patrick J. Kehoe | Stanford University, University College London, Federal Reserve Bank of Minneapolis
V. V. Chari | University of Minnesota, Federal Reserve Bank of Minneapolis

Published August 1, 1998

We show that the desirability of fiscal constraints in monetary unions depends critically on the extent of commitment of the monetary authority. If the monetary authority can commit to its policies, fiscal constraints can only impose costs. If the monetary authority cannot commit, there is a free-rider problem in fiscal policy, and fiscal constraints may be desirable.

Published In: Journal of Monetary Economics (Vol. 54, No. 8, November 2007, pp. 2399-2408)

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