Policy Uncertainty, Symbiosis, and the Optimal Fiscal and Monetary Conservativeness
This paper extends a well-known macroeconomic stabilisation game between monetary and fiscal authorities developed by Dixit and Lambertini 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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