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Uncertainty and fiscal policy in an asymmetric monetary union

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  • Carsten Hefeker

    ()
    (University of Siegen)

  • Blandine Zimmer

    ()
    (University of Siegen)

Abstract

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.

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File URL: http://www.uni-marburg.de/fb02/makro/forschung/magkspapers/13-2009_hefeker.pdf
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Bibliographic Info

Paper provided by Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) in its series MAGKS Papers on Economics with number 200913.

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Length: 18 pages
Date of creation: 2009
Date of revision:
Publication status: Forthcoming in
Handle: RePEc:mar:magkse:200913

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

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References

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  1. Beetsma, R.M.W.J. & Bovenberg, A.L., 1997. "Designing fiscal and monetary institutions in a second best world," Open Access publications from Tilburg University urn:nbn:nl:ui:12-74437, Tilburg University.
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  14. Winkler, Bernhard, 2000. "Which kind of transparency? On the need for clarity in monetary policy-making," Working Paper Series 0026, European Central Bank.
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  16. Benigno, Pierpaolo, 2001. "Optimal Monetary Policy in a Currency Area," CEPR Discussion Papers 2755, C.E.P.R. Discussion Papers.
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Citations

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Cited by:
  1. Meixing Dai & Moïse Sidiropoulos, 2011. "Fiscal disciplining effect of central bank opacity: Stackelberg versus Nash equilibrium," Economics Bulletin, AccessEcon, vol. 31(4), pages 3068-3076.
  2. Carsten Hefeker & Blandine Zimmer, 2010. "Central bank independence and conservatism under uncertainty: Substitutes or complements?," MAGKS Papers on Economics 201001, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  3. Dai, Meixing & Sidiropoulos, Moïse & Spyromitros, Eleftherios, 2010. "Fiscal policy, institutional quality and central bank transparency," MPRA Paper 23766, University Library of Munich, Germany.
  4. Hefeker, Carsten & Zimmer, Blandine, 2011. "The optimal choice of central bank independence and conservatism under uncertainty," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 595-606.
  5. 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.

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