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The Fiscal consequences of deflation: Evidence from the Golden Age of Globalization

Antonio Afonso and Joao Jalles

The Quarterly Review of Economics and Finance, 2019, vol. 74, issue C, 129-147

Abstract: We study the fiscal consequences of deflation on a panel of 17 economies in the first wave of globalization, between 1870 and 1914. By means of impulse response analyses and panel regressions, we find that a 1% fall in the price level is associated with an increase in the public debt ratio of about 0.23–0.33 percentage points and accounting for trade openness, monetary policy and the exchange rate raises the absolute value of the coefficient on deflation. For government revenue, lagged deflation comes out with a statistically significant negative coefficient, while government primary expenditure seems relatively invariant to changes in prices. Moreover, a 1% decrease in the price level is associated with a rise in the revenue to GDP ratio of about 0.02 percentage points, a reverse Olivera-Tanzi effect.

Keywords: Debt; Inflation; Local projection; Impulse response functions; GMM; Cross-sectional dependencies; Business cycle (search for similar items in EconPapers)
JEL-codes: C33 E31 E50 E62 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (10)

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Working Paper: The Fiscal Consequences of Deflation: Evidence from the Golden Age of Globalization (2016) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:74:y:2019:i:c:p:129-147

DOI: 10.1016/j.qref.2019.01.016

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