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The Simple Macroeconomics of Fiscal Austerity, Public Sector Debt and Deflation

  • Thomas I. Palley

    ()

    (New America Foundation, Washington DC)

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.

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File URL: http://www.boeckler.de/pdf/p_imk_wp_8_2010.pdf
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Paper provided by IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute in its series IMK Working Paper with number 8-2010.

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Length: 16 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:imk:wpaper:8-2010
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