Research Proposal for J.R. Smallwood Foundation Research Grant, 2017

A cliometric analysis of the fiscal deficits and debt dynamics of Newfoundland during the 1920-30s

Summary of Research

The proposed research project is a cliometric study – the application of economic modelling and econometrics to re-examine the dynamics of the mounting fiscal deficits and public debt crisis in Newfoundland during the 1920-30s. An economic model is first specified to characterize the evolution of debt-to-GDP ratio over time in terms of the primary deficit, interest payments on outstanding debt and growth in real GDP. Historical statistics are then collected to estimate the parameters of the model. The empirical results are expected to address the following key questions:

(1). Were the persistent fiscal deficits of the Newfoundland government under the period of study

cyclical or structural?

(2). Were the persistent fiscal deficits a consequence of primary deficits? And

(3). Was the debt-to-GDP ratio of Newfoundland stable or explosive during the period under study?

The empirical findings and answers to these questions are expected to enable us to determine whether the Newfoundland government was really bankrupt because of fundamentally financial and political crises or it simply confronted a short-term liquidity problem following the Great Depression. This should clarify and also shed light on the controversies about the debt crisis and the Amulree Report of 1933. In sum, this proposed study contributes to the existing literature on Newfoundland Studies. More importantly, there are lessons to be learned from this historical study as the findings should have important fiscal policy implications for not only the Newfoundland and Labrador government today but also other small open economies that are plagued by the risk of debt crises.