Fiscal Deficits as a Source of Boom and Bust under a Common Currency
Giovanni Ganelli () and
Neil Rankin ()
Discussion Papers from Department of Economics, University of York
We investigate in depth, using predominantly analytical, rather than numerical, methods, the mechanisms which operate following a one-period, debt-financed, fiscal deficit in a small open economy operating under a common currency. The economy incorporates the New Keynesian features of staggered price setting and overlapping generations. Unsurprisingly, these features cause the impact effect to be a boom, in the sense of a positive output gap. However we also find that the boom must later turn into a bust, or negative output gap. Moreover inflation also follows a boom-bust pattern and on average there is deflation rather than inflation.
Keywords: staggered prices; overlapping generations; small open economy; currency union; fiscal deficits; government debt; output gap (search for similar items in EconPapers)
JEL-codes: E62 F45 H62 (search for similar items in EconPapers)
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Journal Article: Fiscal deficits as a source of boom and bust under a common currency (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:yor:yorken:18/05
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