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Fiscal Policy and the Inflation Target

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  • Peter Tulip

    (Reserve Bank of Australia)

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    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 overestimates 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 U.S. economy. I find that fiscal activism can substitute for a high inflation target. If fiscal policy behaves as it has recently, then an increase in the inflation target is not warranted, despite increased volatility of macroeconomic shocks.

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    Bibliographic Info

    Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

    Volume (Year): 10 (2014)
    Issue (Month): 2 (June)
    Pages: 63-96

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    Handle: RePEc:ijc:ijcjou:y:2014:q:2:a:3

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    1. Cogan, John F. & Cwik, Tobias & Taylor, John B. & Wieland, Volker, 2009. "New Keynesian versus old Keynesian government spending multipliers," CEPR Discussion Papers 7236, C.E.P.R. Discussion Papers.
    2. Roberto M. Billi & George A. Kahn, 2008. "What is the optimal inflation rate?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-28.
    3. John B. Taylor, 2000. "Reassessing Discretionary Fiscal Policy," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 21-36, Summer.
    4. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
    5. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348 National Bureau of Economic Research, Inc.
    6. John B. Taylor, 1999. "Introduction to "Monetary Policy Rules"," NBER Chapters, in: Monetary Policy Rules, pages 1-14 National Bureau of Economic Research, Inc.
    7. anonymous, 2004. "The macroeconomics of fiscal policy," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 49(Jun).
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