Unions, fiscal policy and central bank transparency ∗ Giuseppe Ciccarone † Giovanni Di Bartolomeo Enrico Marchetti Department of Public Economics, University of Rome ”La Sapienza” August 5, 2005 Abstract In a unionised economy with supply-side fiscal policy transparency has two con- trasting effects on economic performance. Uncertainty on central bank’s preferences induces unions to reduce wages but also produces a fully-anticipated expansionary fiscal policy which favours the setting of higher wages. Even if the net effect depends on the preference parameters of public entities and on the effectiveness of fiscal pol- icy on aggregate supply: (i) the positive effects of opacity in unionised economies without fiscal policy are confirmed when the central bank is populist; (ii) if it is instead sufficiently conservative, transparency reduces inflation and the output gap, but at the cost of higher macroeconomic volatility. JEL Classification: E58, 052 Keywords: Central bank transparency, Inflation, uncertainty. * We thank F. Farina, F. Giuli, M. Manzo, J. Melitz, P. Natale, N. Salvatori, P. Tirelli and seminar participants at the University of Milan Bicocca, Siena (Jean Monnet Lectures) and Pisa. We are also particularly indebted to A. Annibali, B. Liseo and L. Petrella. The usual disclaimer holds. Financial support from the University of Rome ”La Sapienza” and MIUR is gratefully acknowledged. † Corresponding author; Department of Public Economics, University of Rome ”La Sapienza”, Via del Castro Laurenziano, 9 00161 Rome, Italy. E-mail: giuseppe.ciccarone@uniorma1.it. 1