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Uncertainty and Fiscal Policy in an Asymmetric Monetary Union

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  • Carsten Hefeker
  • Blandine Zimmer

Abstract

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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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2008/wp-cesifo-2008-09/cesifo1_wp2389.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2389.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2389

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Keywords: monetary union; fiscal policy; transparency of monetary policy; asymmetries;

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References

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  1. Daniel Gros & Carsten Hefeker, 2000. "One Size Must Fit All. National Divergences in a Monetary Union," CESifo Working Paper Series 326, CESifo Group Munich.
  2. Eijffinger, S.C.W. & Hoeberichts, M.M., 2000. "Central Bank Accountability and Transparency: Theory and Some Evidence," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-86187, Tilburg University.
  3. Beetsma, R.M.W.J. & Bovenberg, A.L., 1995. "Monetary union without fiscal coordination may discipline policymakers," Discussion Paper, Tilburg University, Center for Economic Research 1995-59, Tilburg University, Center for Economic Research.
  4. Eijffinger, Sylvester C W & van der Cruijsen, Carin A B, 2007. "The Economic Impact of Central Bank Transparency: A Survey," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6070, C.E.P.R. Discussion Papers.
  5. Grüner, Hans Peter & Hayo, Bernd & Hefeker, Carsten, 2005. "Unions, wage setting and monetary policy uncertainty," Working Paper Series, European Central Bank 0490, European Central Bank.
  6. Beetsma, R.M.W.J. & Bovenberg, A.L., 1995. "Designing fiscal and monetary institutions in a second-best world," Discussion Paper, Tilburg University, Center for Economic Research 1995-47, Tilburg University, Center for Economic Research.
  7. Beetsma, Roel M.W.J. & Debrun, Xavier, 2007. "The new stability and growth pact: A first assessment," European Economic Review, Elsevier, Elsevier, vol. 51(2), pages 453-477, February.
  8. Benigno, Pierpaolo, 2004. "Optimal monetary policy in a currency area," Journal of International Economics, Elsevier, Elsevier, vol. 63(2), pages 293-320, July.
  9. Dixit, Avinash & Lambertini, Luisa, 2003. "Symbiosis of monetary and fiscal policies in a monetary union," Journal of International Economics, Elsevier, Elsevier, vol. 60(2), pages 235-247, August.
  10. M. Demertzis & A. Hughes Hallet, 2002. "Central Bank Transparency in Theory and Practice," WO Research Memoranda (discontinued), Netherlands Central Bank, Research Department 704, Netherlands Central Bank, Research Department.
  11. Linda S. Goldberg & Michael W. Klein, 2005. "Establishing Credibility: Evolving Perceptions of the European Central Bank," NBER Working Papers 11792, National Bureau of Economic Research, Inc.
  12. Winkler, Bernhard, 2000. "Which kind of transparency? On the need for clarity in monetary policy-making," Working Paper Series, European Central Bank 0026, European Central Bank.
  13. Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 112(483), pages 532-565, November.
  14. Brender, Adi & Drazen, Allan, 2005. "Political budget cycles in new versus established democracies," Journal of Monetary Economics, Elsevier, Elsevier, vol. 52(7), pages 1271-1295, October.
  15. Nergiz Dincer & Barry Eichengreen, 2009. "Central Bank Transparency: Causes, Consequences and Updates," NBER Working Papers 14791, National Bureau of Economic Research, Inc.
  16. S[empty]rensen, Jan Rose, 1991. "Political uncertainty and macroeconomic performance," Economics Letters, Elsevier, Elsevier, vol. 37(4), pages 377-381, December.
  17. Ismihan, Mustafa & Gulcin Ozkan, F., 2004. "Does central bank independence lower inflation?," Economics Letters, Elsevier, Elsevier, vol. 84(3), pages 305-309, September.
  18. Dixit, Avinash & Lambertini, Luisa, 2001. "Monetary-fiscal policy interactions and commitment versus discretion in a monetary union," European Economic Review, Elsevier, Elsevier, vol. 45(4-6), pages 977-987, May.
  19. Carsten Hefeker, 2008. "Uncertainty And Wage Setting In A Monetary Union," Manchester School, University of Manchester, University of Manchester, vol. 76(4), pages 391-404, 07.
  20. Giuseppe Ciccarone & Enrico Marchetti & Giovanni Di Bartolomeo, 2007. "Unions, Fiscal Policy And Central Bank Transparency," Manchester School, University of Manchester, University of Manchester, vol. 75(5), pages 617-633, 09.
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Citations

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Cited by:
  1. Carsten Hefeker & Blandine Zimmer, 2010. "Central bank independence and conservatism under uncertainty: Substitutes or complements?," Volkswirtschaftliche Diskussionsbeiträge, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht 140-10, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
  2. Meixing Dai & Moïse Sidiropoulos & Eleftherios Spyromitros, 2014. "Fiscal policy, institutional quality and central bank transparency," Working Papers of BETA 2014-04, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  3. Dai, Meixing & Sidiropoulos, Moïse, 2010. "Monetary and fiscal policy interactions with central bank transparency and public investment," MPRA Paper 23704, University Library of Munich, Germany.
  4. Dai, Meixing & Sidiropoulos, Moïse, 2011. "Fiscal disciplining effect of central bank opacity: Stackelberg versus Nash equilibrium," MPRA Paper 29843, University Library of Munich, Germany.
  5. Hefeker, Carsten & Zimmer, Blandine, 2011. "The optimal choice of central bank independence and conservatism under uncertainty," Journal of Macroeconomics, Elsevier, Elsevier, vol. 33(4), pages 595-606.
  6. Carsten Hefeker & Blandine Zimmer, 2014. "Optimal Conservatism and Collective Monetary Policymaking under Uncertainty," CESifo Working Paper Series 4933, CESifo Group Munich.

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