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Fiscal Policy and the Inflation Target

  • Peter Tulip

    (Reserve Bank of Australia)

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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