A Goldilocks Theory of Fiscal Deficits / Atif R. Mian, Ludwig Straub, Amir Sufi.

Format:

Book

Author/Creator:

Mian, Atif R.

Contributor:

National Bureau of Economic Research.

Straub, Ludwig.

Sufi, Amir.

Series:

Working Paper Series (National Bureau of Economic Research) no. w29707.

NBER working paper series no. w29707

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2022.

Summary:

This paper proposes a tractable framework to analyze fiscal space and the dynamics of government debt, with a possibly binding zero lower bound (ZLB) constraint. Without the ZLB, a greater primary deficit unambiguously raises debt. However, debt need not explode: When R < G - φ, where φ is the sensitivity of R - G to debt, a modest permanent increase in the deficit can be sustained forever, a policy we call "free lunch". With the ZLB, the relationship between deficit and debt can become non-monotone. Both high and low deficits can increase debt, as the latter weaken demand and reduce nominal growth at the ZLB. A rise in income inequality expands fiscal space outside the ZLB, but contracts it at the ZLB. Calibrating the model, we find little space for "free lunch" policies for the United States in 2019, but ample space for Japan.

Notes:

Print version record

January 2022.