The Deficit Gamble
AbstractThe historical behavior of interest rates and growth rates in U.S. data suggests that the government can, with a high probability, run temporary budget deficits and then roll over the resulting government debt forever. The purpose of this paper is to document this finding and to examine its implications. Using a standard overlapping-generations model of capital accumulation, the authors show that whenever a perpetual rollover of debt succeeds, policy can make every generation better off. This conclusion does not imply that deficits are good policy, for an attempt to roll over debt forever might fail. But the adverse effects of deficits, rather than being inevitable, occur with only a small probability.
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Bibliographic InfoPaper provided by Harvard - Institute of Economic Research in its series Harvard Institute of Economic Research Working Papers with number 1710.
Date of creation: 1995
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Crowding Out and the Perils of Oversimplified Models
by Tom Bozzo in angry bear on 2009-01-30 22:08:00
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