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Economic Effects of Sustained Budget Deficits

  • Gale, William G.
  • Orszag, Peter R.

The effects of fiscal policy on the economy have received substantial attention in academic and policy circles. We review this literature in light of recent policy debates and new research and obtain three results. First, other things equal, deficits reduce national saving and future national income, even if international capital inflows avert an increase in interest rates. Second, the recent fiscal deterioration implies significant declines in future national income. Third, studies incorporating the best available information about expected future deficits tend to find significant effects of expected deficits on current long-term bond yields, controlling for other factors.

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Article provided by National Tax Association in its journal National Tax Journal.

Volume (Year): 56 (2003)
Issue (Month): 3 (September)
Pages: 463-85

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Handle: RePEc:ntj:journl:v:56:y:2003:i:3:p:463-85
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  1. Martin Feldstein, 1994. "Tax policy and international capital flows," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 130(4), pages 675-697, December.
  2. Stanley Fischer & Julio J. Rotemberg, 1994. "Editorial in "NBER Macroeconomics Annual 1994, Volume 9"," NBER Chapters, in: NBER Macroeconomics Annual 1994, Volume 9, pages 1-8 National Bureau of Economic Research, Inc.
  3. Martin Feldstein, 1986. "Budget Deficits, Tax Rules, and real Interest Rates," NBER Working Papers 1970, National Bureau of Economic Research, Inc.
  4. B. Douglas Bernheim, 1988. "Ricardian Equivalence: An Evaluation of Theory and Evidence," NBER Working Papers 2330, National Bureau of Economic Research, Inc.
  5. Stanley Fischer & Julio J. Rotemberg, 1994. "NBER Macroeconomics Annual 1994, Volume 9," NBER Books, National Bureau of Economic Research, Inc, number fisc94-1, August.
  6. Douglas W. Elmendorf & Jeffrey B. Liebman, 2000. "Social Security Reform and National Saving in an Era of Budget Surpluses," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(2), pages 1-72.
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