Working Paper

Sustainable Price Stability Policies in a Currency Area with Free-Riding Fiscal Policies


  • Faia
  • E.
Publication Date

• A game of strategic interaction among

policy makers in a currency area

a) Single monetary authority and several

fiscal authorities

b) An infinite horizon micro-founded

multiple country model

• Nominal government bonds → temptations

to monetize debt (inflationary bias)

• Liquidity constraints → welfare costs

of inflation (equally shared among area


• Sequential policy moves →government

expenditure bias