CNB seminar "Can Growth Stabilize Debt? A Fiscal Theory Perspective"

Prague, 21 May 2025

Michaela Elfsbacka Schmöller (European Central Bank)

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Michaela Elfsbacka Schmöller is a Senior Research Economist at the European Central Bank (Directorate General Research) and Bank of Finland. Her research focuses primarily on topics from macroeconomics, monetary policy, fiscal policy, productivity and growth.

Can Growth Stabilize Debt? A Fiscal Theory Perspective (abstract)

This paper studies price stability and debt sustainability when the real rate exceeds trend growth (r > g) in a New Keynesian model with endogenous growth through R&D. Fiscal deficits not backed by future surpluses are partly paid for through technology-led growth, which attenuates fiscal inflation. A dynamic r - g stability criterion characterizes feasible monetary-fiscal frameworks. If surpluses do not adjust to stabilize debt, the central bank must permit r-g to fall with inflation. Monetary policy which follows the Taylor principle can be consistent with a unique stable equilibrium under active fiscal policy, as growth creates fiscal capacity by expanding long-run aggregate supply.