g) in a New Keynesian model with endogenous technology growth through R&D. Endogenous growth constitutes a self-financing mechanism for deficits which backs debt and attenuates fiscal inflation. A dynamic r − g stability criterion characterizes the set of feasible monetary-fiscal frameworks. If surpluses do not adjust to stabilize debt, the central bank must permit r − g to fall with inflation. Monetary policy which follows the Taylor principle can be consistent with a unique stable equilibrium under active fiscal policy as growth endogenously creates fiscal capacity and policy space."> g) in a New Keynesian model with endogenous technology growth through R&D. Endogenous growth constitutes a self-financing mechanism for deficits which backs debt and attenuates fiscal inflation. A dynamic r − g stability criterion characterizes the set of feasible monetary-fiscal frameworks. If surpluses do not adjust to stabilize debt, the central bank must permit r − g to fall with inflation. Monetary policy which follows the Taylor principle can be consistent with a unique stable equilibrium under active fiscal policy as growth endogenously creates fiscal capacity and policy space."> g) in a New Keynesian model with endogenous technology growth through R&D. Endogenous growth con">
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Can growth stabilize debt? A fiscal theory perspective

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  • Elfsbacka-Schmöller, Michaela
  • McClung, Nigel
Abstract
This paper studies price stability and debt sustainability when the real rate exceeds trend growth (r > g) in a New Keynesian model with endogenous technology growth through R&D. Endogenous growth constitutes a self-financing mechanism for deficits which backs debt and attenuates fiscal inflation. A dynamic r − g stability criterion characterizes the set of feasible monetary-fiscal frameworks. If surpluses do not adjust to stabilize debt, the central bank must permit r − g to fall with inflation. Monetary policy which follows the Taylor principle can be consistent with a unique stable equilibrium under active fiscal policy as growth endogenously creates fiscal capacity and policy space.

Suggested Citation

  • Elfsbacka-Schmöller, Michaela & McClung, Nigel, 2024. "Can growth stabilize debt? A fiscal theory perspective," Bank of Finland Research Discussion Papers 2/2024, Bank of Finland, revised 2024.
    • Handle: RePEc:zbw:bofrdp:281773
    as

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    More about this item

    Keywords

    Public Debt; Inflation; Monetary-Fiscal Interaction; Fiscal Theory of the Price Level; Endogenous Growth;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models

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