Uncertainty and Fiscal Policy in an Asymmetric Monetary Union

24 Pages Posted: 8 Sep 2008

See all articles by Carsten Hefeker

Carsten Hefeker

University of Siegen - School of Economic Disciplines

Blandine Zimmer

University of Strasbourg - Bureau of Economic Theory and Application (BETA)

Date Written: September 2008

Abstract

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.

Keywords: monetary union, fiscal policy, transparency of monetary policy, asymmetries

JEL Classification: E58, E63, F36

Suggested Citation

Hefeker, Carsten and Zimmer, Blandine, Uncertainty and Fiscal Policy in an Asymmetric Monetary Union (September 2008). CESifo Working Paper Series No. 2389, Available at SSRN: https://ssrn.com/abstract=1264949 or http://dx.doi.org/10.2139/ssrn.1264949

Carsten Hefeker (Contact Author)

University of Siegen - School of Economic Disciplines ( email )

Hoelderlinstrasse 3
57068 Siegen
Germany

Blandine Zimmer

University of Strasbourg - Bureau of Economic Theory and Application (BETA) ( email )

France

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