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

ISEG Economics Department Working Paper No. WP 23/2016/DE/UECE

31 Pages Posted: 14 Oct 2016

See all articles by António Afonso

António Afonso

University of Lisbon - ISEG (School of Economics and Management); UECE (Research Unit on Complexity and Economics); ISEG Lisbon School of Economics and Management,Universidade de Lisboa; REM - Research in Economics and Mathematics

João Tovar Jalles

University of Lisbon; International Monetary Fund (IMF); Technical University of Lisbon (UTL) - Research Unit on Complexity and Economics (UECE)

Date Written: October 12, 2016

Abstract

We study a panel of 17 economies in the first wave of globalization, between 1870 and 1914, regarding the fiscal consequences of deflation. 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 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 debt ratio increases when deflation is also associated with an economic recession. For government revenue, its lag yields a statistically significant negative coefficient while government primary expenditure seems relatively invariant to changes in prices.

Keywords: debt, deflation, local projection, impulse response functions, GMM, recessions, expansions

JEL Classification: C33, E31, E50, E62

Suggested Citation

Afonso, António and Jalles, João Tovar, The Fiscal Consequences of Deflation: Evidence from the Golden Age of Globalization (October 12, 2016). ISEG Economics Department Working Paper No. WP 23/2016/DE/UECE , Available at SSRN: https://ssrn.com/abstract=2831154 or http://dx.doi.org/10.2139/ssrn.2831154

António Afonso (Contact Author)

University of Lisbon - ISEG (School of Economics and Management) ( email )

R. Miguel Lupi, 20
Lisbon, 1248-078
Portugal
+351 21 392 5985 (Phone)
+351 21 396 6407 (Fax)

HOME PAGE: http://www.iseg.ulisboa.pt/aquila/homepage/aafonso/research

UECE (Research Unit on Complexity and Economics) ( email )

Rua Miguel Lupi 20
Lisbon, 1249-078
Portugal
+351-213 925 912 (Phone)
+351-213 971 196 (Fax)

HOME PAGE: http://uece.rc.iseg.ulisboa.pt/

ISEG Lisbon School of Economics and Management,Universidade de Lisboa ( email )

Rua do Quelhas 6
LISBOA, 1200-781
Portugal

REM - Research in Economics and Mathematics ( email )

ISEG, Universidade de Lisboa
Rua Miguel Lupi, 20
Lisboa, 1249-078
Portugal

HOME PAGE: http://rem.rc.iseg.ulisboa.pt/

João Tovar Jalles

University of Lisbon ( email )

R. Branca Edmée Marques
Dept. Plant Biology
Lisboa, 1600-276
Portugal

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Technical University of Lisbon (UTL) - Research Unit on Complexity and Economics (UECE)

Rua Miguel Lupi, 20
Lisboa, 1200-781
Portugal

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