Time Inconsistency and Free-Riding in a Monetary Union

Varadarajan Chari and Patrick Kehoe

Journal of Money, Credit and Banking, 2008, vol. 40, issue 7, 1329-1356

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. Copyright (c) 2008 Federal Reserve Bank of Minneapolis with Exclusive License to Print by The Ohio State University.

Date: 2008
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Working Paper: Time Inconsistency and Free-Riding in a Monetary Union (2010)
Working Paper: Time inconsistency and free-riding in a monetary union (2008)
Working Paper: Time Consistency and Free-Riding in a Monetary Union (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:40:y:2008:i:7:p:1329-1356

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