Policy Uncertainty, Symbiosis, and the Optimal Fiscal and Monetary Conservativeness
14 Pages Posted: 9 Nov 2008 Last revised: 4 May 2010
Date Written: June 1, 2008
This paper extends a well-known macroeconomic stabilization game between monetary and fiscal authorities introduced by Dixit and Lambertini (American Economic Review, 93: 1522-1542) to multiplicative (policy) uncertainty. We find that even if fiscal and monetary authorities share a common output and inflation target (i.e. the symbiosis assumption), the achievement of the common targets is no longer guaranteed; under multiplicative uncertainty, in fact, a time consistency problem arises unless policymakers' output target is equal to the natural level.
Keywords: Monetary-Fiscal Policy Interactions, Uncertainty, Symbiosis
JEL Classification: E61, E63
Suggested Citation: Suggested Citation