Monetary policy arithmetic for a deflationary economy

This paper characterizes general properties of an economy that experiences deflation by investigating the long-run government budget constraint. A sufficient condition for deflation in an economy under a balanced budget is that the nominal interest rate is below the output growth rate. With a primary deficit, deflation occurs in a liquidity trap if the government is heavily in debt. Simple budget arithmetic reveals that it is never possible to finance a negative currency seigniorage by rolling over the public debt.