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Fiscal Policy and the Inflation Target

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  • Peter Tulip

    (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 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.

Suggested Citation

  • Peter Tulip, 2014. "Fiscal Policy and the Inflation Target," International Journal of Central Banking, International Journal of Central Banking, vol. 10(2), pages 63-96, June.
  • Handle: RePEc:ijc:ijcjou:y:2014:q:2:a:3
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    Cited by:

    1. Philip Coyle & Taisuke Nakata, 2019. "Optimal Inflation Target with Expectations-Driven Liquidity Traps," Finance and Economics Discussion Series 2019-036, Board of Governors of the Federal Reserve System (U.S.).
    2. Philip Coyle & Taisuke Nakata, 2020. "Optimal Inflation Target with Expectations-Driven Liquidity Traps," CARF F-Series CARF-F-485, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    3. Palek, Jakob, 2015. "The Optimal Monetary and Fiscal Policy Mix in a Financially Heterogeneous Monetary Union," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113047, Verein für Socialpolitik / German Economic Association.
    4. Frédérique Bec & Patrick Kanda, 2019. "Is inflation driven by survey-based, VAR-based or myopic expectations?," Working Papers hal-02175836, HAL.
    5. Bec, Frédérique & Kanda, Patrick, 2020. "Is inflation driven by survey-based, VAR-based or myopic expectations? An empirical assessment from US real-time data," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    6. António Afonso & João Tovar Jalles, 2017. "Fiscal Activism and Price Volatility: Evidence from Advanced and Emerging Economies," Working Papers Department of Economics 2017/04, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    7. Declan Trott, 2015. "Australia and the Zero Lower Bound on Interest Rates: Some Monetary Policy Options," Agenda - A Journal of Policy Analysis and Reform, Australian National University, College of Business and Economics, School of Economics, vol. 22(1), pages 5-20.

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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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