Can growth stabilize debt? A fiscal theory perspective

Michaela Elfsbacka Schmöller and Nigel McClung

No 2/2024, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: This paper studies price stability and debt sustainability when the real rate exceeds trend growth (r > g) in a New Keynesian model with endogenous technology growth through R&D. Endogenous growth constitutes a self-financing mechanism for deficits which backs debt and attenuates fiscal inflation. A dynamic r − g stability criterion characterizes the set of feasible monetary-fiscal frameworks. If surpluses do not adjust to stabilize debt, the central bank must permit r − g to fall with inflation. Monetary policy which follows the Taylor principle can be consistent with a unique stable equilibrium under active fiscal policy as growth endogenously creates fiscal capacity and policy space.

Keywords: Public Debt; Inflation; Monetary-Fiscal Interaction; Fiscal Theory of the Price Level; Endogenous Growth (search for similar items in EconPapers)
JEL-codes: E24 E31 E52 E62 O42 (search for similar items in EconPapers)
Date: 2024, Revised 2024
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fdg, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofrdp:281773

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