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, we 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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5015.
Date of creation: Feb 1995
Date of revision:
Publication status: published as Journal of Money, Credit and Banking, Vol. 30 (November 1998): 699-720.
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Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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Other versions of this item:
- Laurence Ball & Douglas W. Elmendorf & N. Gregory Mankiw, 1995. "The Deficit Gamble," Harvard Institute of Economic Research Working Papers 1710, Harvard - Institute of Economic Research.
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- repec:fth:calaec:8-93 is not listed on IDEAS
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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