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The Simple Macroeconomics of Fiscal Austerity, Public Sector Debt and Deflation
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 longerfatcat:hndv5xllszexxhljijqelvqlj4