The paper examines the monetary-fiscal interactions in a monetary union model with uncertainty due to imperfect central bank transparency. We first show that monetary uncertainty disciplines fiscal policymakers and thereby reduces taxes, average inflation and output distortions. However, as more members enter the monetary union, the fiscal disciplining effect of uncertainty is mitigated. As a consequence, monetary union enlargement may lead to a more aggressive fiscal stance in some member countries, depending on their relative economic and political weights, on their government’s spending target, and on the change in the degree of uncertainty that they experience with the enlargement.
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number
CESifo Working Paper No. 2389.
Find related papers by JEL classification: E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
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