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Fiscal Policy and the Inflation Target

  • Peter Tulip

    (Reserve Bank of Australia)

Registered author(s):

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.

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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2014-02.

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Date of creation: Mar 2014
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Handle: RePEc:rba:rbardp:rdp2014-02
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  1. David L. Reifschneider & Peter Tulip, 2007. "Gauging the uncertainty of the economic outlook from historical forecasting errors," Finance and Economics Discussion Series 2007-60, Board of Governors of the Federal Reserve System (U.S.).
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  3. David L. Reifschneider & John C. Williams, 2000. "Three lessons for monetary policy in a low-inflation era," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 936-978.
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  7. Yuriy Gorodnichenko & Johannes Wieland & Olivier Coibion, 2012. "The Optimal Inflation Rate in New Keynesian Models: Should Central Banks Raise Their Inflation Targets in Light of the Zero Lower Bound?," 2012 Meeting Papers 70, Society for Economic Dynamics.
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