To avoid being trapped in such a situation, or to mitigate the shock associated with that situation, it is vital that the government will continue with its sound fiscal management. That is important in terms of preventing the problem associated with shrinking excess savings from surfacing. Put differently, the government needs to show its firm commitment to fiscal consolidation.
Moreover, the government needs to implement its path toward such consolidation in order to avoid leaving an impression with the market that it is not serious about the issue. The scenario that I have laid out contains a number of assumptions. In practice, the end of deflation will generate higher tax revenue as the nominal growth rate rises.