Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/209788 
Year of Publication: 
2000
Series/Report no.: 
Arbeidsnotat No. 2000/15
Publisher: 
Norges Bank, Oslo
Abstract: 
The paper discusses the role of fiscal policy as an instrument for macroeconomic stabilisation when monetary policy pursues inflation targeting. Within a theoretical model of an open economy with a traded and non-traded sector, we show that inflation targeting may lead to large sectoral imbalances when fiscal policy is passive. There is a potentially large welfare gain from an active fiscal policy, in particular when sectoral stability is included in the welfare function. However, with reasonable parameter values, a small cost of adjusting fiscal policy reduces the optimal degree of activism considerably. The reason is that a given change in output requires a large change in the fiscal policy stance under inflation targeting, because of the monetary policy reaction function.
Subjects: 
inflation targeting
fiscal policy
monetary policy
small open economy
JEL: 
E52
E62
F41
Persistent Identifier of the first edition: 
ISBN: 
82-7553-174-8
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Working Paper
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