Deflation and Public Finances: Evidence from the Historical Records

By Nicolas End, Sampawende J Tapsoba, G. Terrier, Renaud Duplay

July 28, 2015

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Nicolas End, Sampawende J Tapsoba, G. Terrier, and Renaud Duplay. Deflation and Public Finances: Evidence from the Historical Records, (USA: International Monetary Fund, 2015) accessed December 25, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Deflation, Economic growth, Economic recession, Fiscal policy, Fiscal stance, Inflation, Prices, Public debt

Keywords: Deflation, Deflation episode, Deflation sample, Deflation t, Economic recession, Expansionary deflation, Fiscal policy, Fiscal stance, Global, Inflation, Inflation rate, Inflation shock, Interest rate, Low inflation, Public finances, Recessionary deflation, WP

Publication Details

Pages:

41
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/176
Stock No:

WPIEA2015176
ISBN:

9781513528243
ISSN:

1018-5941

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