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Uncertainty and fiscal policy in an asymmetric monetary union

We examine monetary and fiscal interactions in a monetary union model with uncertainty due to imperfect central bank transparency. It is first shown that monetary uncertainty discourages excessive taxation and may thus reduce average inflation and output distortions. However, as countries enter...

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Bibliographic Details
Published in:MAGKS - Joint Discussion Paper Series in Economics (Band 13-2009)
Main Authors: Hefeker, Carsten, Zimmer, Blandine
Format: Work
Language:English
Published: Philipps-Universität Marburg 2009
Subjects:
Wirtschaft
asymmetries.
transparency of monetary policy,
fiscal policy
Monetary union
Economics
Online Access:PDF Full Text
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Summary:We examine monetary and fiscal interactions in a monetary union model with uncertainty due to imperfect central bank transparency. It is first shown that monetary uncertainty discourages excessive taxation and may thus reduce average inflation and output distortions. However, as countries enter the monetary union, this tax-restraining effect of uncertainty is mitigated. The monetary union may hence lead to higher fiscal distortions in some member countries, depending on governments’ spending targets and on the change in the degree of uncertainty implied by common monetary policy.
ISSN:1867-3678
DOI:10.17192/es2023.0227

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