TY - JOUR
T1 - The fiscal consequences of deflation
T2 - evidence from the golden age of globalization
AU - Afonso, António
AU - Jalles, João Tovar
N1 - Funding agency: Fundação para a Ciência e a Tecnologia (FCT)
PY - 2019/11
Y1 - 2019/11
N2 - 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.
AB - 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.
KW - Business cycle
KW - Cross-sectional dependencies
KW - Debt
KW - GMM
KW - Impulse response functions
KW - Inflation
KW - Local projection
UR - http://www.scopus.com/inward/record.url?scp=85064498775&partnerID=8YFLogxK
U2 - 10.1016/j.qref.2019.01.016
DO - 10.1016/j.qref.2019.01.016
M3 - Article
AN - SCOPUS:85064498775
VL - 74
SP - 129
EP - 147
JO - Quarterly Review of Economics and Finance
JF - Quarterly Review of Economics and Finance
SN - 1062-9769
ER -