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DOES DEFLATION IMPINGE ON A GOVERNMENT'S FISCAL STANDING?

By Atsumasa Kondo and Koji Kitaura

Abstract

This paper uses a dynamic general equilibrium model with money to investigate theoretically under what conditions deflation impinges on a government's fiscal standing. Focus is placed on an upper bound that is compatible with a no Ponzie game condition for the government and an equilibrium. A comparative dynamics analysis demonstrates that if a government's fiscal deficit is not so high, deflation has a negative impact on the upper bound, while if a government's fiscal deficit exceeds a critical level, deflation rather improves it. The critical level depends on a time stream of disposable real incomes and a preference parameter. Copyright 2009 The Authors. Journal compilation 2009 Blackwell Publishing Asia Pty Ltd

DOI identifier: 10.1111/j.1468-0106.2009.00478.x
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