Fiscal stagnation

Luca Fornaro () and Martin Wolf
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Luca Fornaro: https://www.upf.edu/web/econ/faculty/-/asset_publisher/6aWmmXf28uXT/persona/id/3420861

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

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: Fiscal Policy; Public Debt; Endogenous Productivity Growth; Stagnation; Investment. (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-inv
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