Fiscal Policy and the Inflation Target

Peter Tulip

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: Low interest rates in the United States have recently been accompanied by large fiscal stimulus. However, discussions of monetary policy have neglected this fiscal activism, leading to over-estimates of the costs of the zero lower bound and, hence, of the appropriate inflation target. To rectify this, I include countercyclical fiscal policy within a large-scale model of the US economy. I find that fiscal activism can substitute for a high inflation target. An increase in the inflation target is not warranted, despite increased volatility of macroeconomic shocks, so long as fiscal policy behaves as it has recently.

Keywords: fiscal policy; zero bound; inflation target (search for similar items in EconPapers)
JEL-codes: E52 E62 (search for similar items in EconPapers)
Date: 2014-03
New Economics Papers: this item is included in nep-cba, nep-ger, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Journal Article: Fiscal Policy and the Inflation Target (2014)
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