Zero Inflation Targets: Central Bank Commitment and Fiscal Policy Outcomes

Peter J. Stemp
University of Melbourne
P.Stemp@ecomfac.unimelb.edu.au

William M. Scarth
McMaster University, Canada

Abstract

This paper considers a central bank with a zero inflation target and a fiscal authority with a differing objective. Situations under which the fiscal authority is able to exploit the central bank's commitment to zero inflation are examined. An example using a calibrated model shows that, in practice, it may be irrelevant whether or not the fiscal authority is aware of the central bank's objective.