Munich Personal RePEc Archive

Fiscal Policy in a Monetary Union in the Presence of Uncertainty about the Central Bank Preferences

Dai, Meixing and Sidiropoulos, Moise (2008): Fiscal Policy in a Monetary Union in the Presence of Uncertainty about the Central Bank Preferences.

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Abstract

In this paper, we examine the link between political transparency of a common central bank (CCB) and decentralized supply-side fiscal policies in a monetary union. We find that the opacity of a conservative CCB has a restrictive effect on national fiscal policies since each government internalizes the influence of its actions on the common monetary policy and thus reinforces the disciplinary effect of institutional constraints such as the Stability and Growth Pact on national fiscal authorities. However, more opacity could imply higher inflation and unemployment when the union is large enough and induce higher inflation and output-gap variability. An enlargement of the union incites national governments to increase tax rate, and weakens the disciplinary effects of opacity on member countries if fiscal policymaking is relatively decentralized and the CCB quite conservative. It induces an increase in the level of inflation and unemployment, and could increase inflation and output-gap variability.

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