Department of Economics and Business - Universitat Pompeu Fabra

Title:: Fiscal stagnation
Authors:: Luca Fornaro and Martin Wolf
Date:: April 2025
Abstract:: We study public debt sustainability in an economy with endogenous productivity growth. Our model has two key features: i) financing large primary surpluses entails fiscal distortions that depress investment and growth, ii) low growth increases the primary surpluses needed to stabilize the public debt-to-GDP ratio. Negative shocks to fundamentals or pessimistic animal spirits may drive the economy into a state of fiscal stagnation, characterized by high public debt, large fiscal distortions and low productivity growth. We discuss policy options to avoid/escape fiscal stagnation.
Keywords:: Fiscal Policy, Public Debt, Endogenous Productivity Growth, Stagnation, Investment.
JEL codes:: E22, E62, H63, O40.
Area of Research:: Macroeconomics and International Economics

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