Budget uncertainty in a monetary union

Cornel Oros and Blandine Zimmer

European Journal of Political Economy, 2020, vol. 63, issue C

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.

Keywords: Budget uncertainty; Robust control; Monetary institutions (search for similar items in EconPapers)
JEL-codes: E (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:poleco:v:63:y:2020:i:c:s017626802030032x

DOI: 10.1016/j.ejpoleco.2020.101884

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