NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

On the Desirability of Fiscal Constraints in a Monetary Union

V.V. Chari, Patrick J. Kehoe

NBER Working Paper No. 10232*
Issued in January 2004
NBER Program(s):   EFG    IFM

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.

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