Discussion of “Can Deficits Finance Themselves?”by Angeletos, Lian and Wolf
Huixin Bi
Federal Reserve Bank of Kansas City

IMF-CARF-TCER-WASEDA University Conference
June 2024

The opinions expressed in this discussion are those of the author and do not reflect the views of the Federal Reserve Bank of Kansas City or the Federal
Reserve System.

Summary
I Deficits can finance themselves in a model:lack of Ricardian equivalence and Nominal rigidity.
I Discount future tax changes;
I Front load spending.

I Deficits can be fully financed if fiscal adjustments are sufficiently
delayed.
I Self-financing is predominantly through tax base.

I This paper provides a simple framework with closed-form solutions:
I Transmission carries over to richer model structures.

I Very elegant paper with important contributions to the literature.

Comment: Fiscal Multipliers

I What makes the (full) self-financing results possible?
I (Very) large fiscal multipliers.

Comment: Fiscal Multipliers

I What makes the (full) self-financing results possible?
I (Very) large fiscal multipliers.
I Self-financing is predominantly through tax base.
I Sufficient expansion in tax base → sufficient increases in tax revenue topay off debt without increases in tax rate.
I Further delayed fiscal adjustments → larger fiscal multipliers → higher
self-financing share.

Comment: Fiscal MultipliersComment: Monetary Policy

I The size of fiscal multiplier depends on monetary policy.
I Baseline assumption: (expected) real rate is fixed.
(MP )
(PC )
→rt ≡ it − Et πt +1 = 0πt = κwt + Et πt +1
κ1i t = π t − wtββ(Compared to standard Taylor rule: it = ψπt +φyt )I Weakly ‘active’ monetary policy ψ = 1 > 1.
βI Nominal rate goes down when marginal cost goes up.

Comment: Monetary Policy and PC
I The paper discusses the importance of monetary policy and the slopeof Phillips Curve.
I Alternative assumption in the paper: it = ψπt

I More ‘active’ monetary policy as well as a steeper PC → lower
self-financing share.

Comment: Policy Relevance

I How likely can we implement such a policy?
I One-off (emergency) fiscal spending seems most relevant.
I COVID fiscal stimulus
I WWI war spendingEvent: COVID
I Massive fiscal relief followed by a rapid tightening in labor market aswell as a sharp increase in inflation.

(a) HWI and Fiscal Spending
Source: FRED(b) HWI and CPI

Event: WWI and Spanish Flu
I Massive war spending and Spanish Flu followed by a rapid tightening inlabor market as well as a sharp rise in price level.

(a) HWI and Fiscal Spending
Source: Bi,Petrosky-Nadeau,Traum,Woodward (2024), FRED(b) HWI and CPI

Comment: Unfunded Fiscal Expansion

I Related to the literature on unbacked/unfunded fiscal expansions:
I Jacobson, Leeper, and Preston (2024): “emergency” spending by
Roosevelt in 1930s.
I Bianchi, Faccini, and Melosi (2023): ARP Act in 2021.

I Transmission mechanism is different in this paper.
I Monetary policy is active: real rate is fixed.
I Fiscal policy is passive: expect future tax increases (which may notneeded however).

Conclusion

I A thought-provoking paper!
I It offers policy makers an “easier” fiscal policy prescription.
I More suitable in an economy with liquidity trap than one with supply
constraints.