Uncertainty and fiscal policy in an asymmetric monetary union
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Philipps-Universität Marburg
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.
Keywords
Monetary union, transparency of monetary policy,, asymmetries., fiscal policy