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This paper examines the impact of deflation on fiscal aggregates. With deflation relatively rare in modern history, it relies mostly on the historical records, using a dataset panel covering 150 years and 21 advanced economies. Empirical evidence shows that deflation affects public finances mostly through increases in public debt ratios, reflecting a worsening in interest rate–growth differentials. On average, a mild rate of deflation increases public debt ratios by almost 2 percent of GDP a year, this impact being larger during recessionary deflations. Using a simulation model that accounts for composition effects and price expectations, we also find that, for European countries, a 2 percentage point deflationary shock in both 2015 and 2016 would lead to a deterioration in the primary balance of as much as 1 percent of GDP by 2019.

Fiscal policy --- Deflation (Finance) --- Disinflation --- Finance --- Tax policy --- Taxation --- Economic policy --- Finance, Public --- Econometric models. --- Government policy --- Inflation --- Macroeconomics --- Public Finance --- Price Level --- Deflation --- Fiscal Policy --- General Financial Markets: General (includes Measurement and Data) --- Wages, Compensation, and Labor Costs: Other --- Economic History: Macroeconomics and Monetary Economics --- Growth and Fluctuations: General, International, or Comparative --- Debt --- Debt Management --- Sovereign Debt --- Business Fluctuations --- Cycles --- Public finance & taxation --- Economic growth --- Fiscal stance --- Public debt --- Economic recession --- Prices --- Debts, Public --- Recessions --- United States