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Budget deficits and U.S. economic growth

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  • Atrayee Ghosh Roy

    ()
    (Minnesota State University, Mankato)

  • Hendrik Van den Berg

    ()
    (University of Nebraska-Lincoln)

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    Abstract

    This paper explores how the U.S. budget deficit affects U.S. economic growth. Time-series data for the 1973-2004 period is applied to a simultaneous equation model to estimate the various direct and indirect effects of budget deficits on growth. The results indicate that, ceteris paribus, an increase in budget deficits slows growth. However, the “twin” current account deficits, which our model shows tend to accompany budget deficits, increase growth. Hence, the overall relationship between budget deficits and economic growth is ambiguous.

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    Bibliographic Info

    Article provided by AccessEcon in its journal Economics Bulletin.

    Volume (Year): 29 (2009)
    Issue (Month): 4 ()
    Pages: 3015-3030

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    Handle: RePEc:ebl:ecbull:eb-08h60001

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    Related research

    Keywords: economic growth; budget deficits; stationary; simultaneity;

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    1. Ball, Laurence & Elmendorf, Douglas W & Mankiw, N Gregory, 1998. "The Deficit Gamble," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 30(4), pages 699-720, November.
    2. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers, Michigan State - Econometrics and Economic Theory 8905, Michigan State - Econometrics and Economic Theory.
    3. Chinn, Menzie D. & Ito, Hiro, 2007. "Current account balances, financial development and institutions: Assaying the world "saving glut"," Journal of International Money and Finance, Elsevier, Elsevier, vol. 26(4), pages 546-569, June.
    4. Fischer, Stanley, 1993. "The role of macroeconomic factors in growth," Journal of Monetary Economics, Elsevier, Elsevier, vol. 32(3), pages 485-512, December.
    5. Aart Kraay & Jaume Ventura, 2005. "The Dot-Com Bubble, the Busch Deficits and the US Current Account," Working Papers 216, Barcelona Graduate School of Economics.
    6. Laurence Ball & N. Gregory Mankiw, 1995. "What do Budget Deficits Do?," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1740, Harvard - Institute of Economic Research.
    7. Esfahani, Hadi Salehi, 1991. "Exports, imports, and economic growth in semi-industrialized countries," Journal of Development Economics, Elsevier, Elsevier, vol. 35(1), pages 93-116, January.
    8. Selahattin Dibooglu, 1997. "Accounting for US current account deficits: an empirical investigation," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 29(6), pages 787-793.
    9. Bleaney, Michael & Greenaway, David, 2001. "The impact of terms of trade and real exchange rate volatility on investment and growth in sub-Saharan Africa," Journal of Development Economics, Elsevier, Elsevier, vol. 65(2), pages 491-500, August.
    10. Mendoza, Enrique G., 1997. "Terms-of-trade uncertainty and economic growth," Journal of Development Economics, Elsevier, Elsevier, vol. 54(2), pages 323-356, December.
    11. Henning Bohn, 1991. "The sustainability of budget deficits with lump-sum and with income-based taxation," Proceedings, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, pages 580-612.
    12. Edwards, Sebastian, 1998. "Openness, Productivity and Growth: What Do We Really Know?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 108(447), pages 383-98, March.
    13. Christopher Blattman & Jason Hwang & Jeffrey G. Williamson, 2003. "The Terms of Trade and Economic Growth in the Periphery 1870-1938," NBER Working Papers 9940, National Bureau of Economic Research, Inc.
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