Monetary Discipline as a Substitute for Fiscal Reforms and Market Liberalisations

In an economy with wage-setting unions where the government has gains from redistribution, we analyse the incentive of incumbent politicians to implement monetary discipline (e.g. by joining a monetary union) against the adoption of fiscal reforms, or deregulation in product markets. We show that monetary discipline can be a 'substitute' both for better (i.e. less distortionary) fiscal policies and for deregulation in product markets.