An empirical analysis of the effects of fiscal policies on inflation uncertainty in the European Union

The aim of this study is to examine the effects of fiscal policies on inflation uncertainty in the European Union, both old and new members using panel data analysis over the period from 1996:01 to 2009:04. Although there are plenty of studies which examining the relationship between monetaty policy and inflation uncertainty effects of the fiscal policy on inflation uncertainty has been neglected in the literature. In this study first model examines the effects of global control variables and fiscal variables on inflation uncertainty using panel data analysis. In the second model a "fiscal index" is constructed by using canonical correlation analysis. According to fiscal theory of the price level a positive relationship between fiscal variables and the rate of inflation can be expected. Estimation results show the effect of the fiscal index on inflation uncertainty is positive for the all members and old members of the European Union while it is negative for new members of the European Union.