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Inflation Targeting or Fiscal Activism?

Author

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  • Billi, Roberto M.

    (Research Department, Central Bank of Sweden)

Abstract

I study the welfare performance of a policy regime of fiscal activism in which fiscal policy acts as an automatic stabilizer and controls inflation, while monetary policy pegs the nominal interest rate. When evaluated through the lens of a standard New Keynesian model, accounting for price and wage rigidities and for a zero lower bound (ZLB) on the nominal interest rate, fiscal activism can substantially outperform inflation targeting in the face of both demand shocks and technology shocks. Fiscal activism can also eliminate the occurrence of ZLB episodes.

Suggested Citation

  • Billi, Roberto M., 2022. "Inflation Targeting or Fiscal Activism?," Working Paper Series 412, Sveriges Riksbank (Central Bank of Sweden).
    • Handle: RePEc:hhs:rbnkwp:0412
    as

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    References listed on IDEAS

    as
    1. Roberto M. Billi & Jordi Galí, 2020. "Gains from Wage Flexibility and the Zero Lower Bound," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 82(6), pages 1239-1261, December.
    2. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
    3. De Long, James Bradford & Summers, Lawrence H, 1986. "Is Increased Price Flexibility Stabilizing?," American Economic Review, American Economic Association, vol. 76(5), pages 1031-1044, December.
    4. Bhattarai, Saroj & Eggertsson, Gauti B. & Schoenle, Raphael, 2018. "Is increased price flexibility stabilizing? Redux," Journal of Monetary Economics, Elsevier, vol. 100(C), pages 66-82.
    5. Campbell Leith & Eric Leeper, 2016. "Understanding Inflation as a Joint Monetary-Fiscal Phenomenon," Working Papers 2016_01, Business School - Economics, University of Glasgow.
    6. J. B. Taylor & Harald Uhlig (ed.), 2016. "Handbook of Macroeconomics," Handbook of Macroeconomics, Elsevier, edition 1, volume 2, number 2.
    7. Billi, Roberto M., 2020. "Unemployment fluctuations and nominal GDP targeting," Economics Letters, Elsevier, vol. 188(C).
    8. Garín, Julio & Lester, Robert & Sims, Eric, 2016. "On the desirability of nominal GDP targeting," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 21-44.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    automatic stabilizers; Öscal and monetary interactions; government debt;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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