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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

Abstract: 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)
Date: 2018-06
New Economics Papers: this item is included in nep-dge and nep-mac
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Journal Article: Fiscal deficits as a source of boom and bust under a common currency (2020) Downloads
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