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Balanced Budgets: Economic Nirvana Or Fiscal Chaos?

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  • RICHARD H. DAY

Abstract

This paper investigates the effect of a pay‐as‐you‐go, balanced budget policy on macroeconomic performance. It uses a simple model of the aggregate demand for money and goods, with temporary monetary equilibrium and quantity adjustments on goods markets. Within this framework, if the monetary/real interaction is strong enough, a balanced budget with sufficiently high tax rates (≡ sufficiently high government expenditures) is consistent with typical bounded fluctuations around a relatively high income, low unemployment equilibrium. Lower tax rates (≡ lower government expenditures) can trigger a sharp decline in revenues, expenditures, employment, and output.

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  • Richard H. Day, 1996. "Balanced Budgets: Economic Nirvana Or Fiscal Chaos?," Contemporary Economic Policy, Western Economic Association International, vol. 14(2), pages 15-25, April.
    • Handle: RePEc:bla:coecpo:v:14:y:1996:i:2:p:15-25
    DOI: 10.1111/j.1465-7287.1996.tb00610.x
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    1. Sinai, Allen & Eckstein, Otto, 1983. "Tax policy and business fixed investment revisited," Journal of Economic Behavior & Organization, Elsevier, vol. 4(2-3), pages 131-162.
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