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Time inconsistency and free-riding in a monetary union

Chari, VV; Kehoe, PJ; (2008) Time inconsistency and free-riding in a monetary union. Journal of Money, Credit and Banking , 40 (7) pp. 1329-1355. 10.1111/j.1538-4616.2008.00162.x. Green open access

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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.

Type: Article
Title: Time inconsistency and free-riding in a monetary union
Open access status: An open access version is available from UCL Discovery
DOI: 10.1111/j.1538-4616.2008.00162.x
Publisher version: https://doi.org/10.1111/j.1538-4616.2008.00162.x
Language: English
Additional information: This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions.
Keywords: monetary regime, fixed exchange rates, dollarization, European Union, Maastricht Treaty, fiscal-policy, discretion
UCL classification: UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of SandHS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/10058299
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