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Uncertainty and Fiscal Policy in an Asymmetric Monetary Union

  • Carsten Hefeker

    ()

  • Blandine Zimmer

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://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. Dixit, Avinash & Lambertini, Luisa, 2003. "Symbiosis of monetary and fiscal policies in a monetary union," Journal of International Economics, Elsevier, vol. 60(2), pages 235-247, August.
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  3. Dixit, Avinash & Lambertini, Luisa, 2001. "Monetary-fiscal policy interactions and commitment versus discretion in a monetary union," European Economic Review, Elsevier, vol. 45(4-6), pages 977-987, May.
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  12. Benigno, Pierpaolo, 2004. "Optimal monetary policy in a currency area," Journal of International Economics, Elsevier, vol. 63(2), pages 293-320, July.
  13. Grüner, Hans Peter & Hayo, Bernd & Hefeker, Carsten, 2005. "Unions, wage setting and monetary policy uncertainty," Working Paper Series 0490, European Central Bank.
  14. Eijffinger, Sylvester C. W. & Hoeberichts, Marco, 2000. "Central Bank accountability and transparency: theory and some evidence," Discussion Paper Series 1: Economic Studies 2000,06, Deutsche Bundesbank, Research Centre.
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