June 2014 issue contents
Fiscal Policy and the Inflation Target

by 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 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.

JEL Codes: E52, E62.

Full article (PDF, 34 pages, 1060 kb)

Discussion by Johannes F. Wieland