Can Deficits Finance Themselves? / George-Marios Angeletos, Chen Lian, Christian K. Wolf.

Format:

Book

Author/Creator:

Angeletos, George-Marios.

Contributor:

National Bureau of Economic Research.

Lian, Chen.

Wolf, Christian K.

Series:

Working Paper Series (National Bureau of Economic Research) no. w31185.

NBER working paper series no. w31185

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2023.

Summary:

We study how fiscal deficits are financed in environments with two key features: (i) nominal rigidity and (ii) a violation of Ricardian equivalence due to finite lives or liquidity constraints. In such environments, deficits contribute to their own financing via two channels: a boom in real economic activity, which expands the tax base, and a surge in inflation, which erodes the real value of nominal government debt. Our main theoretical result relates the potency of such self-financing to the timing of fiscal adjustment. Pushing the fiscal adjustment further into the future helps generate a larger and more persistent boom, leading to more self-financing. Full self-financing is possible in the limit as fiscal adjustment is delayed more and more: the government can run a deficit today, refrain from tax hikes or spending cuts in the future, and nevertheless see its debt converge back to its initial level. We conclude by arguing that a large degree of self-financing is not only theoretically possible but also quantitatively relevant.

Notes:

Print version record

April 2023.