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Deficit-financed tax cuts and interest rates

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Abstract

Why do proposals to lower taxes often meet with opposition in Congress. One argument is that lowering taxes without an equivalent fall in government spending may lead to future budget deficits, which will translate into higher long-term interest rates and a lower level of income. Sylvain Leduc discusses the theoretical arguments under which budget deficits lead to higher interest rates. He also surveys empirical studies that used data on expected budget deficits to document the possibility that increases in future budget deficits are associated with higher real long-term interest rates.

Suggested Citation

  • Sylvain Leduc, 2004. "Deficit-financed tax cuts and interest rates," Business Review, Federal Reserve Bank of Philadelphia, issue Q2, pages 30-37.
    • Handle: RePEc:fip:fedpbr:y:2004:i:q2:p:30-37
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    References listed on IDEAS

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    7. Thomas Laubach, 2009. "New Evidence on the Interest Rate Effects of Budget Deficits and Debt," Journal of the European Economic Association, MIT Press, vol. 7(4), pages 858-885, June.
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