Fiscal Activism Under Inflation Targeting and Non-atomistic Wage Setting

This paper presents a game between a fiscal authority, an independent central bank and non-atomistic wage setters. The effects of fiscal activism and inflation targeting on labour market outcomes are analysed. The results suggest that inflation targeting provides incentive for wage restraint. Moreover, real wages are increasing in the degree of fiscal activism as wage setters exploit the response of a fiscal authority seeking to promote employment. Numerical results suggest that the benefits of targeting inflation are larger when the government pursues an activist policy and therefore that there is some substitutability between fiscal and monetary rules.