Policy uncertainty,symbiosis, and the optimal fiscal and monetary conservativeness |
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Authors: | Giovanni Di Bartolomeo Francesco Giuli Marco Manzo |
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Institution: | (1) University of Teramo, Teramo, Italy;(2) Sapienza University of Rome, Rome, Italy;(3) Italian Ministry of Economics, Rome, Italy |
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Abstract: | This paper extends a well-known macroeconomic stabilization game between monetary and fiscal authorities developed 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. |
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Keywords: | |
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