Abstract: The worldwide financial crisis have exploded fiscal deficit, and the inflation becomes increasingly serious, which brought inflation governance to the forefront of national policy concerns. Compared with the quantity theory of money, the latest developed theory (FTPL) have more advantages on explaining the causes of inflation and raising policy suggestions. Based on FTPL, this paper explores the annual domestic data from 1982 to 2011 and uses the state space model to identify the policy regime in determining the price level. The result indicates that the period 1982－1996 is Mregime and the period 1997-2011 can be described as Fregime. Then, integrated with monetary policy, this paper uses the quarterly data of 1997-2011 and SVAR model to distinguish between short-run and long-run dynamic effects of fiscal policy on inflation under F regime. The empirical research shows that fiscal policy has greater impact than monetary policy on inflation, besides, fiscal policy also has the long-term effect on inflation. Combined with the fact of Chinese economy, we believe that monetary policy is not the main determinant of inflation recently and fiscal policy plays a significant role in controlling inflation. We should adopt discretionary fiscal policy to achieve the macro-goal of price stability and sustainable economic development.

Keyword: Fiscal Policy; Inflation; FTPL; Monetary Policy