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The Role of Uncertain Government Preferences for Fiscal and Monetary Policy Interaction
Olga Kuznetsova  1, *@  , Sergey Merzlyakov  2@  
1 : National Research University Higher School of Economics  (NRU HSE)
2 : National Research University Higher School of Economics
* : Corresponding author

This paper explores the role of uncertain government preferences in a standard linear-quadratic model of fiscal and monetary policy interaction. We show that the effects of preference uncertainty are fastened on uncertainty about the policy multipliers. If the fiscal and monetary multipliers are known, preference uncertainty does not alternate the symbiosis result of policy interaction. In this case, inflation and output are equal to their targets irrespective of the central bank and the government preferences. Uncertainty about the fiscal multiplier creates the inflation bias, and preference uncertainty deteriorates it by lowering output and rising inflation up. Uncertainty about the monetary multiplier creates either standard inflation bias or negative inflation bias with output higher than the target and inflation lower than the target. In this case, preference uncertainty enlarges the absolute value of output gap, while the effect on inflation gap depends on the extent of uncertainty about the monetary multiplier. If both the multipliers are uncertain, the impact of preference uncertainty depends not only on the extent of multiplicative uncertainty, but also on the inflation and output targets.


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