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On the Desirability of Fiscal Constraints in a Monetary Union

Staff Report 330 | Published November 1, 2003

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On the Desirability of Fiscal Constraints in a Monetary Union

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.