Deflation and Public Finances
Author | : Mr.Nicolas End |
Publisher | : International Monetary Fund |
Total Pages | : 41 |
Release | : 2015-07-28 |
ISBN-10 | : 9781513539690 |
ISBN-13 | : 1513539698 |
Rating | : 4/5 (90 Downloads) |
Book excerpt: This paper examines the impact of deflation on fiscal aggregates. With deflation relatively rare in modern history, it relies mostly on the historical records, using a dataset panel covering 150 years and 21 advanced economies. Empirical evidence shows that deflation affects public finances mostly through increases in public debt ratios, reflecting a worsening in interest rate–growth differentials. On average, a mild rate of deflation increases public debt ratios by almost 2 percent of GDP a year, this impact being larger during recessionary deflations. Using a simulation model that accounts for composition effects and price expectations, we also find that, for European countries, a 2 percentage point deflationary shock in both 2015 and 2016 would lead to a deterioration in the primary balance of as much as 1 percent of GDP by 2019.