Deflation and Public Finances: Evidence from the Historical Records

42 Pages Posted: 14 Sep 2015

See all articles by Nicolas End

Nicolas End

International Monetary Fund (IMF)

Sampawende Tapsoba

International Monetary Fund (IMF)

G. Terrier

International Monetary Fund

Renaud Duplay

International Monetary Fund (IMF)

Date Written: July 2015

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: Fiscal policy, Deflation, Low inflation, Inflation, Public finances

JEL Classification: E31, E62, G10, J39, N10

Suggested Citation

End, Nicolas and Tapsoba, Sampawende and Terrier, Gilbert L. and Duplay, Renaud, Deflation and Public Finances: Evidence from the Historical Records (July 2015). IMF Working Paper No. 15/176, Available at SSRN: https://ssrn.com/abstract=2659533

Nicolas End (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Sampawende Tapsoba

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Gilbert L. Terrier

International Monetary Fund

700 19th Street, N.W.
Washington, DC 20431
United States

Renaud Duplay

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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