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Uncertainty and Fiscal Policy in an Asymmetric Monetary Union

  • Carsten Hefeker

    ()

  • Blandine Zimmer

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://hdl.handle.net/10.1007/s11079-009-9120-1
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Article provided by Springer in its journal Open Economies Review.

Volume (Year): 22 (2011)
Issue (Month): 1 (February)
Pages: 163-178

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Handle: RePEc:kap:openec:v:22:y:2011:i:1:p:163-178
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  1. Maria Demertzis & Andrew Hughes Hallet, 2003. "Central Bank Transparency in Theory and Practice," DNB Staff Reports (discontinued) 105, Netherlands Central Bank.
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  19. Ismihan, Mustafa & Gulcin Ozkan, F., 2004. "Does central bank independence lower inflation?," Economics Letters, Elsevier, vol. 84(3), pages 305-309, September.
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