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Uncertainty and fiscal policy in a monetary union: Why does monetary policy transmission matter?

Author

Listed:
  • Cornel Oros

    (Axe 2 (2011-2016) : « Marchés, Cultures de consommation, Autonomie et Migrations » (MSHS Poitiers) - MSHS - Maison des sciences de l'homme et de la société de Poitiers - Université de Poitiers - CNRS - Centre National de la Recherche Scientifique, LEO - Laboratoire d'Économie d'Orleans [UMR7322] - CNRS - Centre National de la Recherche Scientifique - UT - Université de Tours - UO - Université d'Orléans, CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers)

  • Blandine Zimmer

    (LARGE - Laboratoire de Recherche en Gestion et Economie - UNISTRA - Université de Strasbourg)

Abstract

In this paper, we develop a monetary-fiscal game in a monetary union with uncertainty due to imperfect transparency about the central bank's preferences. The objective is to investigate the macroeconomic effects of this uncertainty by explicitly taking into account the role of the monetary policy transmission mechanism. We first consider the case of symmetric monetary transmission in the monetary union and show that if the transmission mechanism is not too strong, monetary uncertainty may be beneficial in terms of macroeconomic performances and stabilisation. We then allow for some transmission asymmetry among the member countries and show that the beneficial impact of monetary uncertainty is exacerbated for countries that are more sensitive to the common monetary policy. More importantly, our findings suggest that the central bank's communication about its preferences could represent a specific instrument to influence inflation expectations and thus macroeconomic outcomes in the member countries.

Suggested Citation

  • Cornel Oros & Blandine Zimmer, 2015. "Uncertainty and fiscal policy in a monetary union: Why does monetary policy transmission matter?," Post-Print hal-01233214, HAL.
  • Handle: RePEc:hal:journl:hal-01233214
    DOI: 10.1016/j.econmod.2015.06.006
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01233214
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    2. Olaoye, Olumide Olusegun & Olomola, P.A., 2022. "Empirical analysis of asymmetry phenomenon in the public debt structure of Sub-Saharan Africa's five biggest economies: A Markov-Switching model," The Journal of Economic Asymmetries, Elsevier, vol. 25(C).
    3. Chortareas, Georgios & Mavrodimitrakis, Christos, 2021. "Policy conflict, coordination, and leadership in a monetary union under imperfect instrument substitutability," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 342-361.
    4. Olaoye, Olumide O. & Eluwole, Oluwatosin O. & Ayesha, Aziz & Afolabi, Olugbenga O., 2020. "Government spending and economic growth in ECOWAS: An asymmetric analysis," The Journal of Economic Asymmetries, Elsevier, vol. 22(C).
    5. Chortareas, Georgios & Mavrodimitrakis, Christos, 2016. "Can monetary policy fully stabilize pure demand shocks in a monetary union with a fiscal leader?," Economic Modelling, Elsevier, vol. 54(C), pages 463-468.
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