Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/105927
Authors: 
Palley, Thomas I.
Year of Publication: 
2010
Series/Report no.: 
IMK Working Paper 8/2010
Abstract: 
This paper explores the macroeconomics of fiscal austerity and deflation in an economy with public debt. A binding budget deficit cap destabilizes the economy by turning the government budget into an automatic destabilizer. Public debt helps maintain AD in the presence of deflation because deflation increases the real value of public interest payments. That makes public debt significantly different from private debt. If the economy is subject to a binding deficit cap, deflation no longer stabilizes output. This is because increased real interest payments must be matched by spending cuts, giving rise to a negative balanced budget multiplier.
Subjects: 
fiscal austerity
budget deficit cap
public debt
deflation growth theory
JEL: 
E12
E60
E62
H62
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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