Fiscal Stagnation

Martin Wolf and Luca Fornaro

No 1488, Working Papers from Barcelona School of Economics

Abstract: We study public debt sustainability in an economy with endogenous productivity growth. Our model has two key features: i) financing large primary surpluses entails fiscal distortions that depress investment and growth, ii) low growth increases the primary surpluses needed to stabilize the public debt-to-GDP ratio. Negative shocks to fundamentals or pessimistic animal spirits may drive the economy into a state of fiscal stagnation, characterized by high public debt, large fiscal distortions and low productivity growth. We discuss policy options to avoid/escape fiscal stagnation.

Keywords: investment; fiscal policy; public policy; Endogenous Productivity Growth; Stagnation (search for similar items in EconPapers)
JEL-codes: E22 E62 H63 O40 (search for similar items in EconPapers)
Date: 2025-04
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-inv
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