"Fiscal Contracts for a Monetary Union."  

Florrin O. Bilbiie
Nuffield College, University of Oxford
CEP, London School of Economics and EUI, Florence

Abstract:	
This paper suggests that in a monetary union: (i) fiscal policies should be delegated
with optimal contracts, perhaps written over the deficit; (ii) policymakers would have 
no incentives to deviate by forming coalitions from the resulting equilibrium when 
exchange of information is allowed for. In a model of a monetary union with decentralized
fiscal authorities and both fiscal-fiscal and fiscal-monetary spillovers, individual 
policymaking is inefficient whereas binding agreements are unfeasible. A centralised 
equilibrium is optimal and time consistent if the policymaker shares the social
preferences and uses non-distortionary fiscal instruments. When policy is decentralized 
with heterogenous preferences of authorities and fiscal policy is distortionary, the 
resulting equilibrium is always inefficient and stable to incentives to collude. 
The optimal policy mix can however be implemented in the decentralized game, via 
delegating all policies (by the same principal) where the resulting equilibrium is 
efficient and coalition-proof.