Fiscal deficits as a source of boom and bust under a common currency
Giovanni Ganelli and
Neil Rankin
Journal of International Money and Finance, 2020, vol. 104, issue C
Abstract:
We investigate in depth, using predominantly analytical rather than numerical methods, the mechanisms triggered by a one-off debt-financed fiscal deficit in a small open economy with a shared currency. The economy incorporates staggered price setting and overlapping generations. Unsurprisingly, these cause the impact effect to be a boom, in the sense of price inflation and a positive output gap. However, contrary to what normally happens in New Keynesian models without extraneous dynamics, the boom later inevitably turns into a bust, i.e. price deflation and a negative output gap. Therefore, in this setting, while short-run Keynesian deficit-based fiscal stimulus ‘works’, it also provokes a medium-run ‘backlash’ in aggregate activity.
Keywords: Staggered prices; Overlapping generations; Small open economy; Currency union; Fiscal deficits; Government debt; Output gap (search for similar items in EconPapers)
JEL-codes: E62 F45 H62 (search for similar items in EconPapers)
Date: 2020
References: Add references at CitEc
Citations: View citations in EconPapers (3)
Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0261560619300373
Full text for ScienceDirect subscribers only
Related works:
Working Paper: Fiscal Deficits as a Source of Boom and Bust under a Common Currency (2018) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:104:y:2020:i:c:s0261560619300373
DOI: 10.1016/j.jimonfin.2020.102149
Access Statistics for this article
Journal of International Money and Finance is currently edited by J. R. Lothian
More articles in Journal of International Money and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().
