Deflation and Public Finances: Evidence from the Historical Records

Nicolas End, Sampawende Tapsoba, G. Terrier and Renaud Duplay

No 2015/176, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; inflation rate; fiscal policy; interest rate; Deflation; Low inflation; Inflation; Public finances; recessionary deflation; deflation episode; expansionary deflation; inflation shock; deflation sample; deflation t; Fiscal stance; Economic recession; Global (search for similar items in EconPapers)
Pages: 41
Date: 2015-07-28
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Citations: View citations in EconPapers (14)

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