"Standard discussions of flexible inflation targeting as an optimal monetary policy abstract completely from the … consequences of monetary policy for the government budget. But at least some of the countries now adopting inflation targeting have … substantial difficulty in controlling fiscal imbalances, so that the additional strains resulting from strict control of inflation …

under a purely forward-looking inflation target. Here we consider in addition optimal tax policy in response to such a … departing from a strict inflation target are modest in the case that fiscal policy responds to the real disturbance in an …