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Uncertainty and fiscal policy in a monetary union: Why does monetary policy transmission matter?

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  • Oros, Cornel
  • Zimmer, Blandine

Abstract

In this paper, we develop a monetary-fiscal game in a monetary union with uncertainty due to imperfect transparency about the central bank's preferences. The objective is to investigate the macroeconomic effects of this uncertainty by explicitly taking into account the role of the monetary policy transmission mechanism. We first consider the case of symmetric monetary transmission in the monetary union and show that if the transmission mechanism is not too strong, monetary uncertainty may be beneficial in terms of macroeconomic performances and stabilisation. We then allow for some transmission asymmetry among the member countries and show that the beneficial impact of monetary uncertainty is exacerbated for countries that are more sensitive to the common monetary policy. More importantly, our findings suggest that the central bank's communication about its preferences could represent a specific instrument to influence inflation expectations and thus macroeconomic outcomes in the member countries.

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  • Oros, Cornel & Zimmer, Blandine, 2015. "Uncertainty and fiscal policy in a monetary union: Why does monetary policy transmission matter?," Economic Modelling, Elsevier, vol. 50(C), pages 85-93.
    • Handle: RePEc:eee:ecmode:v:50:y:2015:i:c:p:85-93
    DOI: 10.1016/j.econmod.2015.06.006
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