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Comparing Alternative Methods of Adjusting U.S. Federal Fiscal Deficits for Cyclical and Price Effects

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  • Neil H. Buchanan

    (The Jerome Levy Economics Institute)

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    Abstract

    In this working paper, Neil H. Buchanan statistically tests six alternative definitions of the federal budget deficit to determine if these definitions improve the results of econometric studies that use the deficit as an exogenous variable. Buchanan wishes to (1) evaluate how well Robert Eisner's conclusion that a price-adjusted deficit definition improves econometric results and (2) compare alternative measures of the deficit. Buchanan's analysis begins with two definitions of the structural deficit published by the government: the Bureau of Economic Analysis's high-employment deficit, which is based on a constant standard of unemployment, and the Congressional Budget Office's standardized employment deficit, which is based on a varying standard of unemployment, namely, the NAIRU. He then compares two sets of price- adjusted structural deficit measures to the set of original definitions. Each original definition is adjusted by using two different calculations of a price effect intended to gauge the change in the value of outstanding government debt. One set of price-adjusted measures is obtained by subtracting the product of the year-end par value of outstanding debt and the annual rate of inflation from each of the original measures of structural deficits. The second price-adjusted set third set is obtained by subtracting a more complex derivation of a price effect, namely one that accounts for the timing of inflation's effect on prior debt. The results of initial regression analysis indicate that the method of adjusting for price effects is more important than the method of adjusting for cyclical effects. Using a variety of specifications, time periods, and data definitions, Buchanan's findings did not support the case that deficit spending stimulates GDP growth. However, a relationship was found between unemployment and the deficit, even when the non–price-adjusted measures of the deficit were used. The results of regressions using shorter, 15- year periods show a decline in the importance of price adjusting and a further weakening of the growth-deficit relationship compared to what was found in the initial regressions. The unemployment-deficit relationship, however, was stronger than in the full-period regressions.

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    File URL: http://128.118.178.162/eps/mac/papers/9805/9805025.pdf
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    Bibliographic Info

    Paper provided by EconWPA in its series Macroeconomics with number 9805025.

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    Length: 49 pages
    Date of creation: 23 Jun 1998
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    Handle: RePEc:wpa:wuwpma:9805025

    Note: Type of Document - Acrobat PDF; prepared on IBM PC; to print on PostScript; pages: 49; figures: included
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    Web page: http://128.118.178.162

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    1. Stephen K. McNees, 1991. "How fast can we grow?," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 3-14.
    2. Stuart E. Weiner, 1993. "New estimates of the natural rate of unemployment," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 53-69.
    3. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
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