Fiscal and monetary interaction under monetary policy uncertainty

Despite the increasing number of studies on monetary policy uncertainty, its role on the strategic interaction between fiscal and monetary policies has not been fully explored. Our paper aims to fill this gap by evaluating the consequences produced by multiplicative uncertainty in such a context.

Research Highlights► Strategic interaction between fiscal and monetary policies under monetary policy uncertainty. ► Symbiosis result no longer holds under unknown multiplicative shocks on monetary policy effects. ► Monetary uncertainty and fiscal uncertainty are not symmetric. ► Monetary uncertainty may induce both more and less aggressive effects on the final outcomes according to the kind of existing interaction between the government and the central bank. ► Multiplicative uncertainty implies an endogenous Phillips relationship between inflation and output, which does not emerge under fiscal uncertainty.