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Budget uncertainty in a monetary union

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  • Oros, Cornel
  • Zimmer, Blandine

Abstract

Governments in a monetary union fear spending disturbances. We distinguish them according to their ability to hedge against these disturbances and assume that they derive their optimal fiscal decisions by using a robust control approach. Results show that governments being highly vulnerable to spending disturbances set excessive tax rates, thereby exacerbating the fiscal pressure detrimental to output and obliging the central bank to conduct an expansionary monetary policy. Countries whose governments have higher ability to hedge against spending disturbances then suffer from the inflationary consequences of this monetary policy.

Suggested Citation

  • Oros, Cornel & Zimmer, Blandine, 2020. "Budget uncertainty in a monetary union," European Journal of Political Economy, Elsevier, vol. 63(C).
    • Handle: RePEc:eee:poleco:v:63:y:2020:i:c:s017626802030032x
    DOI: 10.1016/j.ejpoleco.2020.101884
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    References listed on IDEAS

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    More about this item

    Keywords

    Budget uncertainty; Robust control; Monetary institutions;
    All these keywords.

    JEL classification:

    • E - Macroeconomics and Monetary Economics
    • E - Macroeconomics and Monetary Economics
    • E - Macroeconomics and Monetary Economics

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