Welcome to Revise and Resubmit, the podcast where we journey through the world of academic research, diving deep into the ideas that change how we think about economies, policies, and the world around us. Today, we’re exploring one of the most debated topics in economics—fiscal deficits. But we’re asking a bold question: Can deficits actually finance themselves?
Our featured article, titled 'Can Deficits Finance Themselves?', comes from the brilliant minds of George-Marios Angeletos, Chen Lian, and Christian K. Wolf. Published in the September 2024 issue of Econometrica, this paper spans pages 1351 to 1390 and is published by Wiley. Now, let’s pause for a moment and acknowledge just how prestigious Econometrica is—this journal is part of the FT50 list, which includes the top 50 business journals in the world, as recognized by the Financial Times.
In this paper, the authors examine how fiscal deficits might be self-financed under specific economic conditions. They explore environments with two key features: nominal rigidity and a violation of Ricardian equivalence, where people’s lives or liquidity constraints prevent them from perfectly balancing their finances across generations. Through a New Keynesian model, they show that deficits could boost real economic activity, expanding the tax base, and trigger inflation, reducing the real value of government debt. Essentially, in the right conditions, a government might run a deficit without having to raise taxes or cut spending in the future.
We’d like to extend our thanks to George-Marios Angeletos, Chen Lian, and Christian K. Wolf for their insightful research, and Wiley for publishing this article in one of the world’s most prestigious journals and making it open access.
So, the question we leave you with—could we be on the verge of rewriting the rules of fiscal policy? Let’s find out.
Reference
Angeletos, G. M., Lian, C., & Wolf, C. K. (2024). Can Deficits Finance Themselves?. Econometrica, 92(5), 1351-1390. https://doi.org/10.3982/ECTA21791
