Fiscal stagnation

Fornaro, Luca; Wolf, Martin

Fiscal stagnation

Citation

Fornaro, L, Wolf, M. Fiscal stagnation. 2025. handle: http://hdl.handle.net/10230/70240

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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.