The Fiscal Consequences of Deflation: Evidence from the Golden Age of Globalization

Antonio Afonso and Joao Jalles

No 2016/23, Working Papers Department of Economics from ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa

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 percent fall in the price level leads to an increase in the public debt ratio of about 0.23- 0.32 pp. and accounting for trade openness, monetary policy and the exchange rate raises the absolute value of the coefficient on deflation. Moreover, the public debt ratio increases when deflation is also associated with a period of economic recession. For government revenue, lagged deflation comes out with a statistically significant negative coefficient, while government primary expenditure seems relatively invariant to changes in prices. Key Words : debt, deflation, local projection, impulse response functions, GMM, recessions, expansions

JEL-codes: C33 E31 E50 E62 (search for similar items in EconPapers)
Date: 2016-10
New Economics Papers: this item is included in nep-his and nep-mac
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Citations: View citations in EconPapers (1)

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Journal Article: The Fiscal consequences of deflation: Evidence from the Golden Age of Globalization (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:ise:isegwp:wp232016

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