The Fiscal Consequences of Deflation : Evidence from the Golden Age of Globalization

We study a panel of 17 economies in the first wave of globalization, between 1870 and 1914, regarding the fiscal consequences of deflation. By means of impulse response analyses and panel regressions, we find that a 1 percent fall in the price level leads to an increase in the debt ratio of about 0.23-0.32 pp. and accounting for trade openness, monetary policy and the exchange rate raises the absolute value of the coefficient on deflation. Moreover, the debt ratio increases when deflation is also associated with an economic recession. For government revenue, its lag yields a statistically significant negative coefficient while government primary expenditure seems relatively invariant to changes in prices