- Journal: IMF Research Bulletin, 2014, 15 (4), pp.1-4.
- Co-authors: Nicolas End (IMF), Gilbert Terrier (IMF), Renaud Duplay (IMF)
- Publication date: December 2014
Abstract
Entrenched low inflation (“lowflation”) or negative inflation (deflation) has become a source of concern in several advanced economies. This is particularly true for fiscal policymakers. With lowflation (say positive inflation below 2 percent) or deflation, downward rigidities in both tax brackets and expenditures make fiscal policy more challenging. Deflation is rare in modern history. This article uses both simulations and a dataset panel covering 150 years and 18 advanced economies to uncover its impact on public finances. The evidence is in line with the intuition of deflation having a negative impact on debt ratios; the impact on primary balances is, however, more difficult to assess. While the historical record suggests that, as ratios to GDP, primary balances are broadly immune from lowflation or deflation; this may be due to the quality of data during part of the period under review. In addition, fiscal policy has profoundly changed since the Second World War, and is now called to play a more active role than in the past. In the current economic environment, slipping into deflation could propel already-elevated debt ratios into an unsafe zone.
WP version: “Deflation and Public Debt: Evidence from the Historical Records” IMF Working Paper 15/176.
