| Abstract | Generally speaking, fiscal expansion will lead to inflation. This paper will reconsider this issue by introducing productive government expenditure into a new Keynesian model with only sticky prices, and estimating it by Bayesian methods using the sample from 1998:1 to 2014:1. We find that (1) productive fiscal policy can influence inflation dynamics through both aggregate demand and aggregate supply channel. Although the former will push inflation, the latter will depress it. The relative strength depends on the productivity; (2) Based on quarterly data in China, we find that fiscal expansion pull inflation down significantly in the sample period; (3) Credit and monetary policy are more important factors determining inflation. In addition, these discoveries are robust to different form of utility function, investment adjustment cost function and alternative specifications on labor market. By examining the effects of fiscal news shock, we find that revealing relevant information about future policy is helpful to stabilize the public’s expectation. |