Fiscal Stimulus Under Average Inflation Targeting

Abstract. The stimulus effects of expansionary fiscal policy under average inflationtargeting (AIT) depends on both monetary and fiscal policy regimes. AITfeatures an inflation makeup under the monetary regime, but not under thefiscal regime. In normal times, AIT amplifies the short-run fiscalmultipliers under both regimes while mitigating the cumulative multipliesdue to intertemporal substitution. In a zero-lower-bound (ZLB) period, AITreduces fiscal multipliers under a monetary regime by shortening theduration of the ZLB through expected inflation makeup. Under the fiscalregime, AIT has a nonlinear effect on fiscal multipliers because of theabsence of inflation makeup and the presence of a nominal wealth effect