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Fiscal Stimulus Under Average Inflation Targeting

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Abstract

The stimulus effects of expansionary fiscal policy under average inflation targeting (AIT) depends on both monetary and fiscal policy regimes. AIT features an inflation makeup under the monetary regime, but not under the fiscal regime. In normal times, AIT amplifies the short-run fiscal multipliers under both regimes while mitigating the cumulative multiplies due to intertemporal substitution. In a zero-lower-bound (ZLB) period, AIT reduces fiscal multipliers under a monetary regime by shortening the duration of the ZLB through expected inflation makeup. Under the fiscal regime, AIT has a nonlinear effect on fiscal multipliers because of the absence of inflation makeup and the presence of a nominal wealth effect.

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  • Zheng Liu & Jianjun Miao & Dongling Su, 2022. "Fiscal Stimulus Under Average Inflation Targeting," Working Paper Series 2022-22, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfwp:95010
    DOI: 10.24148/wp2022-22
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    More about this item

    Keywords

    average inflation targeting; fiscal multipliers; monetary policy rules; fiscal policy; DSGE models;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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